Petition for Writ of Certiorari — Cellco Partnership v. Litman

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Supreme Court, U.S.

FILED

\ No. 1o107398 — SEP 20 2010

OFFICE OF THE CLERK

IN THE

Supreme Caurt of the United States

sienna cmnimmemameaii

CELLCO PARTNERSHIP D/B/A VERIZON WIRELESS

Petitioner

KEITH LITMAN, b’T AL,

Respondents.

ON PETITION FOR A Writ OF CERTIORARL TO THE

Unirep States Court or APPEALS FOR THE Trirp Cirncurr

PETITION FOR WRIT OF CERTIORARI

Puiiie R. SELLINGER ANDREW G. McBripe

Topp L. SCHLEIFSTEIN Counsel of Record

GREENBERG TrAURIG, LLP THomas R. McCartiy

200 Park Avenue STEPHEN J. OBERMELER

Ilorham Park, NJ 07982 | J. Miciuarnt CONNOLLY

(973) 360-7900 Winey Rein LLP

1776 K Street, N.W.

Washington, DC 20006

202) 719-7000

amebride@wileyrein.com

September 20, 2010 Attorneys for Petitioner

232 186 cP

COUNSLE PRESS

(BOO) 274-8821 © CXOO) 259 GRSO

QUESTION PRESENTED

Whether the Federal Arbitration Act (“FAA”)

preempts States from conditioning the enforcement of

arbitration agreements on the availability of elass-wide

arbitration.

PARTIES TO THE PROCEEDING

AND RULE 29.6 STATEMENT

Petitioner in this case is Celleo Partnership d/b/a

Verizon Wireless. Celleo Partnership d/b/a Verizon

Wireless has four partners. ‘Two of the partners,

representing 55% of the interest in Cellco, are ultimately

owned by Verizon Communications Ine. (‘Verizon’).

These partners are: Bell Atlantic Mobile Systems, Ine.

and GTE Wireless Incorporated (collectively, the

“Verizon Partners”). None of the Verizon Partners is

publiely held. Two of the partners, representing 45°% of

the interest in Cellco, are ultimately owned by Vodafone

Group Ple (“Vodafone”). These partners are: PCS

Nucleus, L.P and JV PartnerCo, LC (collectively, the

“Vodafone Partners”). None of the Vodafone Partners

is publicly held.

Verizon is a publicly held Delaware corporation.

Vodafone is a publicly held British corporation. Neither

Verizon nor Vodafone has a parent company, and no

publicly held company has a 10% or greater ownership

in either entity.

Respondents are Keith Litman and Robert Wachtel.

TABLE OF CONTENTS

Page

QUESTION PRESENTED <55.<3 ce cc eens i

PARTIES TO THE PROCEEDING

AND RULE 29.6 STATEMENT ........... ii

TABLE OF COUR TEGELS oacceckekene ck oe ili

TABLE OF APPR MEIES 6555s eos cea nes \

TABLE OF CITED AUTHORITIES ......... vi

PETITION FOR A WRIT OF

Cae a es oe ore ee eee ee ee I

COP IN TRIINS EREAOW 5 ee ie elites ee ee 1

PUTER FR is oan we ee l

CONSTITUTIONAL AND STATUTORY

PCY Fausirees LIU WOEIN EHD cg Sas ta vee cares l

wo # Ug OO yl RP ee ae oe EAD Gr umiAnr yr 2

1. The Federal Arbitration Act. ............... 4

2. New Jersey Has A Separate, Different

Unconscionability Standard For

RIC ee ee en eee 6

3. Verizon Wireless’s Arbitration Provision. ... 8

4. The Proceedings Below. ...... ic .cccuccacas 8)

lable of Contents

Pave

REASONS FOR GRANTING THE

Pe ee Pe eee a eee ea RTA ST 11

I. As The Court’s Recent Grant Of Certiorari

In Concepcion Demonstrates, This Case

Satisfies The Rule 10 Standard For

ee i gg ea ate emanate arene ae 11

ll.Review Of This Case ls Warranted Because

The Decision Below Conflicts With The FAA

And This Court's Precedent. ............... 14

A. Seetion 2 Preempts State Law That Does

Not Relate To “The Making Of The

Agreement To Arbitrate,” Including

Substantive Uneconseionability. ......... 14

B. Section 2 Preempts New Jersey From

Manipulating Its Unconscionability

Doetrine To Disfavor Arbitration

POU. |g his 5 ve 6 CKD ANS AEN Ea ee

1. The FAA Prevents States from

Applying Laws or Doctrines that

Uniquely Disfavor Arbitration. ..... be

2. New Jersey Courts’ Distort

Unconscionability Law to Disfavor

Arbitration Agreements. .......... 24

C. Muhammad Confliets With The Policies

LINGETIVING TRO FAAS ees sess 30

ae a RE a ne eee a doe wr hn yw 34

TABLE OF APPENDICES

Page

APPENDIX A — OPINION OF THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT, FILED

ee ec eke cee ewes la

APPENDIX B — OPINION OF THE

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY, DATED

POEMEPEGES 2, 2OUG ..... 2.2.2.2... eee Sa

TABLE OF CITEDAUTHORITIES

Page

CASES

14 Penn Plaza LLC v. Pyett,

eo |) ra 32, 33

Abel Holding Co. v. American District

Telegraph Co.,

350 A.2d 292 (N.J. Super. Ct. Law Div.

tee Scien yh ons ag ns cu css see. 25

AT&T Co. v. Central Office Telegraph, Inc.,

EE ce ee ee nee sees 21

AT&T Mobility LLC v. Concepcion,

es at |) passim

Allied-Bruce Terminix Cos. v. Dobson,

a 6. 12.20

B&S Ltd. v. Elephant & Castle

International, Inc.,

906 A.2d 511 (N.J. Super. Ct. 2006) ......... 7

Dean Witter Reynolds v. Byrd,

| passim

Discover Bank v. Superior Court,

Dee eae Be (Ml. 2000). ............... passim

Delaware & H. Canal Co. v. Pennsylvania

Coal Co.,

60) 19

Vil

Cited Authorities

Page

Delta Funding Corp. v. Harris,

Pia Fame 206 CIN. COM) 6c vk cache eke cdnes 7, 29

Doctor's Associates, Inc. v. Casarotto,

ne Mites ME NE os a ee ws passim

Estate of Ruszala v. Brookdale Living

Communities, Inc.,

2010 WL 3118695 (N.J. Super. Aug.

Wa MEE ees CS ee Swe ee reek 26, 28

Gay v. CreditInform,

Dll Foe gee Uae Cit. DT) ots eck de a aed 9,10

Geier v. America Honda Motor Co.,

Oe ME OS ak bk cde beeed ba Seduces 30

Gilmer v. Interstate/Johnson Lane Corp.,

RP As PEED odin cane b sce vncpnacxs 17-18, 28

Hall Street Associates, LLC v. Mattel, Inc.,

ee to es arco ere ra oeore 31, 32

Henry v. Lehigh Valley Coal Co.,

Pe Oe DS Cee Ss vee ee 19

Homa v. American Express Co.,

ow a Pen Gs |) a a 10

Howard v. Diolosa,

074 A.2d 995 (N.J. Super. Ct. 1990) ......... 7, 26

vill

Cited Authorities

Page

Iberia Credit Bureau, Inc. v. Cingular

Wireless LLC,

379 F.3d 159 (5th Cir. 2004) ............ 6, 23, 29

Laster v. AT&T Mobility LLC,

584 F-3d 849 (9th Cir. 2009) ............... 11-12

Lytle v. CitiFinancial Services, Inc.,

810 A.2d 643 (Pa. Super. Ct. 2002) .......... 9

Marcinczyk v. State of New Jersey Police

Training Committee,

968 A.2d 1205 (N.J. Super. Ct. App.

Div. 2008)... o.oo sub eee ace eee eS

Mastrobuono v. Shearson Lehman

Hutton, Inc.,

514 U.S. 52 (19008) ... 0 ceaceeden eee 30

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc.,

473 U.S. G14 (986) .23535. eee 17, 30, 32, 34

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp.,

460 U.S. 1 (1968) . «0.02.55 uasee ee 5, 13, 30

Muhammad v. County Bank of

Rehoboth Beach,

912 A.2d 88 (N.J. 2006)... 3 ee passim

Cited Authorities

Page

National Railroad Passenger Corp. v.

Consolidated Rail Corp.,

892 F.2d 1066 (D.C. Cir. 1990) ............. 16, 17

Oblix, Inc. v. Winiecki,

374 F.3d 488 (7th Cir. 2004) ................ 23

Perry v. Thomas,

482 U.S. 483 (1987) 2.0.0.0 00. 23

Preston v. Ferrer,

552 U.S. 346 (2008) 2.0... 5, 14

Prima Paint Corp. v. Flood & Conklin

Manufacturing Co.,

388 U.S. 395 (1967) 2.20.2. 16-17

Keibold v. Simon Aerials, | nC.,

859 F. Supp. 193 (E.D. Va. 1994) ............ 26

Rodriguez de Quijas v. Shearson/American

Express, Inc.,

490 U.S. 477 (1989) 2... 18

Saturn Distribution Corp. v. Williams,

905 F.2d 719 (4th Cir. 1990) ................ 30

Scherk v. Alberto-Culver Co.,

417 U.S. 506 (1974) 2.0. 4, 30, 32

Securities Industry Association v. Connolly,

883 F.2d 1114 (1st Cir. 1989) se sanseveccccce MN

Cited Authorities

Page

Shearson/American Express, Inc. v.

McMahon,

Gan Uae. See Clee) > asc 17

Sitogum Holdings, Ine. v. Ropes,

800 A.2d 915 (N.J. Super. Ct. 2002) ... 6, 7, 24, 25

Skilling v. United States,

ROO S. OC, SRPG GOED) gg ng oon ccd ceeds cen. 13

Southland Corp. v. Keating,

Cees SITE. FCO ns odes oc avecnweuscte 2,14

Stelluti v. Casapenn Enierprises, LLC.

2010 WL 3033884 (N.J. Aug. 5, 2010)

Stolt-Nielsen S.A. v. AnimalFeeds

International Corp.,

ae OR. Tre ne = oo hk Sa ee passim

Stutson v. United States,

DOW Us BO CIS iio os Secc eae 3

Supak & Sons Manufacturing Co. v. Pervel

Industrial, Inc.,

993 F.2d 135 (4th Cir. 1979) ................ 16

Thibodeau v. Comcast Corp.,

912 A.2d 874 (Pa. Super. Ct. 2006) .......... 9

Cited Authorities

Page

United Steelworkers of Am. v. Warrior &

Gulf Nav. Co.,

We We PO RROD. ood sean c vee ce sen een 31

Vasquez v. Glassboro Serv. Association, Inc.,

S15 A.28 1166 (N.S. 100) oo oc. ic cc ts 27

Volt Information Scis., Inc. v. Board of

Trustees,

ee Rtas SO CRUD vn sos eno add oobidiadecs 21

Zimmerman v. Cohen,

gS BD) eee er 19

STATUTES & CONSTITUTIONAL PROVISIONS

U.S. Const., Art. VI, cl.2 .................... 1

SAME EM ev cdc ee ep acu aSi wees aneweenee. passim

le Oe EE rr ry oy Phere are pee 15

ete ee Soe eee Saree ee 4, 15, 16, 31

Me WAR, © RUMORS) oo eos he een ce teehee wes 1

eee ye rr er rrr rr ree 33

a ee Sore ee 28

Xil

Cited Authorities

Page

LAW REVIEW & JOURNAL ARTICLES

Harry Baum & Leon Pressman, The

Enforcement of Commercial Arbitration

Agreements in the Federal Courts,

8 N.Y.U.L.Q. Rev. 238 (1930) ............... 20

Julius Henry Cohen, The Law of Commercial

Arbitration and the New York Statute,

er esi WE CREED 5 6 b's on rbtn > cevexa es 19

Krie, Bernhardt, and Section 2 of the United

States Arbitration Act: A Farrago of

Rights, Remedies, and a Right to a Remedy,

OP BUM its Rt CE bc whe ccccacceases 17, 20, 21

Moses H. Grossman, Trade Security Under

Arbitration Laws,

ce Shee tt Peer error eee 19

The Arbitrable Issue: The Problem of Fraud,

28 Fordham L. Rev. 802 (1959) ............. 20

The New Federal Arbitration Law,

Ee i ee Oe ee CI ae iki ro ao kone eek 21

Cited Authorities

Pave

LEGISLATIVE MATERIALS

Arbitration of Interstate Commercial

Disputes: Joint Hearings Before the

Subeomms. on the Judiciary, 68th

CR. ee RE Sa re eee ere eae iene 20, Zi

£2, 0R.. BOGOR ING. BUG CRUD yc sca ska kes 32

PUBLICATIONS

Wesley A. Sturges, A T'reatise on Commercial

Arbitrations and Awards § 15 (1930)

NS OE SUN AG ee aN eee 18, 19, 34

OTHER AUTHORITIES

Amicus Brief of CTIA — The Wireless Ass'n as

Amicus Curiae in Support of Petitioner at 7,

16, AT&T Mobility LLC v. Concepcion, 130

5..Ct. 3822 (2010) (No. 08-805). 2.55 .55...... 8,12

PETITION FOR A WRIT OF CERTIORARI

Petitioner Cellco Partnership d/b/a Verizon Wireless

(“Verizon Wireless”) respectfully submits this petition

for a writ of certiorari to review the judgment of the

United States Court of Appeals for the Third Cireuit.

OPINIONS BELOW

The decision of the United States Court of Appeals

for the Third Circuit is unreported but is available at

2010 WL 2017665, and is reprinted in the Appendix

(“App.”) at la-7a. The trial court’s decision granting

Petitioner’s petition to compel arbitration is unreported

but is available at 2008 WL 4507573, and is reprinted at

App. Sa-28a.

JURISDICTION

The United States Court of Appeals for the Third

Circuit rendered its decision on May 21, 2010. App. la.

This Court granted the Petitioner’s application for an

extension of time to file a petition for a writ of certiorari

and extended the time to and including September 20,

2010. Order, Application No. 10A129 (July 30, 2010). This

Court has jurisdiction under 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The Supremacy Clause of the United States

Constitution (U.S. Const., Art. VI, cl. 2), provides in

pertinent part:

This Constitution, and the Laws of the United

States which shall be made in Pursuance

thereof... shall be the supreme Law of the

Land; and the Judges in every State shall be

bound thereby, any Thing in the Constitution

or Laws of any State to the Contrary

notwithstanding.

section 2 of the kederal Arbitration Act (“FAA”), 9

U.S.C. § 2, provides in pertinent part:

A written provision in... a contract

evidencing a transaction involving commerce

to settle by arbitration a controversy

thereafter arising out of such contract or

transaction, ...oran agreement in writing to

submit to arbitration an existing controversy

arising out of such contract, transaction, or

refusal, shall be valid, irrevocable, and

enforceable, save upon such grounds as exist

at law or in equity for the revocation of any

contract.

STATEMENT

This petition presents a recurring issue of great

importance: whether the Federal Arbitration Act

preempts States from conditioning the enforcement of

arbitration agreements on the availability of class-wide

arbitration. The Court examined—but did not resolve—

this issue over twenty-five years ago. See Southland

Corp. v. Keating, 465 U.S. 1, 17 (1984). Since then, the

issue has only grown in importance as retail arbitration

agreements have become ubiquitous; indeed, this issue

could affeet “hundreds of millions of arbitration

agreements.” Amicus Brief of CTIA —The Wireless Ass’n

as Amicus Curiae in Support of Petitioner at 7, 16, AT&T

Mobility LLC v. Concepcion, 13808. Ct. 3322 (2010) (No.

09-893).

This petition satisfies the Rule 10 standard for

granting certiorari. The Court has already granted

certiorari in Concepcion, a virtually identical case

presenting the same overarching question of federal law.

Indeed, Concepcion and this case are identical in all

material respects. Both involve: standard-form retail

contracts for wireless service; putative class-actions

under state law alleging that a wireless carrier imposed

unlawful fee increases; motions to compel arbitration in

accordance with arbitration agreements containing

class-arbitration waivers; and state-ecourt decisions

holding class-arbitration waivers unconscionable and

unenforceable. In fact, the state-court decision at issue

here (Muhammad v. County Bank of Rehoboth Beach,

Del., 912 A.2d 88 (N.J. 2006)) expressly relies upon the

state-court decision at issue in Concepcion (Discover

Bank v. Super. Ct., 113 P3d 1100 (Cal. 2005)). See

Muhammad, 912 A.2d at 99. At a minimum, therefore,

the Court should “hold” this petition pending its decision

in Concepcion. See Stutson v. United States, 516 U.S.

163, 181 (1996) (Sealia, J., dissenting) (“We regularly hold

cases that involve the same issue as a case on which

certiorari has been granted|{.]").

However, this petition should be granted in its own

right as it presents an additional theory of preemption

under the FAA that is not the principal focus of

Concepcion—a theory that could fully resolve both

eases. Section 2’s savings clause exempts from

preemption only those state law doctrines that serve as

grounds “for the revocation of any contract.” 9 U.S.C. §

2. To fall within this savings clause, state law must be

both (1) a ground for “revocation” and (2) applicable to

“any contract.” Coneepcion focuses principally on the

latter requirement. This case examines the former as

well, raising the issue whether “grounds for revoeation”

include only state-law doctrines relating to the “making

of an agreement to arbitrate.” /d. § 4. Under this theory,

both Mukammad and Discover Bank fall outside the

ambit of Section 2’s savings clause because they refuse

to enforee arbitration clauses based upon the alleged

unfairness of bilateral arbitration itself. Consideration

of this additional theory of preemption is thus necessary

fora full understanding of Section 2’s preemptive sweep.

A grant of certiorari is warranted here to allow the Court

to address FAA preemption in a comprehensive manner

this Term.

1. The Federal Arbitration Act.

Congress enacted the FAA to “reversl[e] centuries

of judicial hostility to arbitration agreements.” Scherk

v. Alberto-Culver Co., 417 U.S. 506, 510 (1974). The

AA’s primary “purpose was to place an arbitration

agreement ‘upon the same footing as other contracts,

where it belongs,’ H.R. Rep. No. 96, 68th Cong., Ist

Sess., 1 (1924), and to overrule the judiciary’s

longstanding refusal to enforee agreements to

arbitrate.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S.

213, 219-20 (1985). The FAA had a separate goal of

promoting arbitration as a streamlined, efficient

alternative to judicial process. It thus established “a

liberal federal policy favoring arbitration agreements.”

Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,

460 U.S. 1, 24 (1983). In establishing this policy, Congress

“had the needs of consumers, as well as others, in mind.”

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265,

280 (1995) (citing S. Rep. No. 536, 68th Cong., Ist Sess.,

3 (1924) (stating that the Act, by avoiding “the delay

and expense of litigation,” will appeal to “corporate

interests [and]... individuals”)).

To accomplish these goals, Congress made

arbitration agreements “valid, irrevocable, and

enforceable” as a matter of federal law, “save upon such

grounds as exist at law or in equity for the revocation of

any contract.” 9 U.S.C. § 2. It is “well-established” that

Section 2 preempts otherwise applicable state law.

Preston v. Ferrer, 552 U.S. 346, 353 (2008).

Section 2’s savings clause preserves state law only

if it serves as a ground “for the revocation of any

contract.” 9 U.S.C. § 2. State law thus can nullify an

arbitration clause only if it is both (1) a ground for

“revocation” and (2) applicable to “any contract.” The

Concepcion case concerns the second requirement; the

Petitioner there argues that California has adopted a

form of unconscionablity that is selectively applied to

bilateral arbitration clauses. While that element is

present here, the focus of this case is on the requirement

that for state law to deny enforcement to an arbitration

clause it must constitute a ground for “revocation.”

Careful analysis of the text, structure and history of

Section 2 and of the FAA as a whole, establishes that

ground for “revocation” is a term of art for defects in

the formation of the agreement itself. In other words,

the FAA limits state courts to an inquiry into the making

of the agreement to arbitrate, encompassing contract

law doctrines such as fraud and duress. What the FAA

denies states is the right to set their own public policy

up as a bar to arbitration or particular forms of

arbitration. Indeed, the purpose of the FAA was to

preclude state courts from ignoring arbitration

agreements based upon judicial notions of public policy.

The second requirement of Section 2 is that the state

law at issue be applicable to “any contract.” Thus,

doctrines specific to arbitration contracts or clauses are

forbidden by Section 2. See Doctor’s Assocs., Ince. v.

Casarotto, 517 U.S. 681, 687 (1996). This prohibition

includes the manipulation of generally applicable

contract defenses ina manner that disfavors arbitration.

Iberia Credit Bureau, Inc. v. Cingular Wireless LLC,

379 F.3d 159, 167 (Sth Cir. 2004). Both Concepcion and

this case present violations of the “any contract”

requirement, because both California and New Jersey

courts have applied the doctrine of unconscionability in

a manner that disfavors bilateral arbitration clauses.

2. New Jersey Has A Separate, Different

Unconscionability Standard For Arbitration.

In New Jersey, as in most states, a court may relieve

a party from an unconscionable contract. Sitogum

Holdings, Inc. v. Ropes, 800 A.2d 915, 918 (N.J. Super.

Ct. 2002). To be unconscionable under New Jersey law,

a contract must possess elements of both procedural

unconscionability, which examines “the formation of the

contract,” and substantive unconscionability, which

requires “excessively disproportionate terms” or “the

exchange of obligations so one-sided as to shock the

court’s conscience.” /d. at 920-21. New Jersey courts

“generally have applied a sliding-scale approach to

determine overall uneonscionability, considering the

relative levels of both procedural and substantive

unconscionability.” Delta Funding Corp. v. Harris, 912

A.2d 104, 111 (N.J. 2006). Like other contract defenses,

“the burden of proving unconscionability is on the party

asserting it.” B&S Ltd. v. Hlephant & Castle Int'l, Ince.,

906 A.2d 511, 521 (N.J. Super. Ct. 2006).

Following the lead of California courts, New Jersey

courts have developed a separate, different

unconscionability doctrine for consumer arbitration

agreements. See Muhammad, 912 A.2d at 96-103

(relying on Discover Bank). Instead of examining all the

circumstances surrounding the formation of a contract

to determine if the party had a meaningful choice—as

they do outside of the arbitration context, see Stelluti

v. Casapenn Enterprises, 2010 WL 3033884, at *6 (N.J.

Aug. 5, 2010)—New Jersey courts automatically find

procedural unconscionability when an arbitration

agreement is in a standard-form contract. Muhammad,

912 A.2d at 96. And instead of limiting the analysis to

the contract terms as they relate to the parties—as they

do outside the arbitration context, see Howard v.

Diolosa, 574 A.2d 995, 999-1000 (N.J. Super. Ct. 1990)—

New Jersey courts deem provisions in a consumer

arbitration agreement substantively unconscionable for

“public policy” reasons wholly unrelated to the parties

to the arbitration agreement at issue. Muhammad, 912

A.2d at 96-97. Applying a different theory of

unconscionability developed just for arbitration

contracts, New Jersey courts will invalidate consumer

arbitration agreements when the disputes involve low-

dollar amounts, on the assumption that requiring

bilateral arbitration will operate as an unlawful

“exculpatory clause.” Jd. at 99.

3. Verizon Wireless’s Arbitration Provision.

Keith Litman and Robert Wachtel (“Respondents”),

Verizon Wireless customers since at least 2004, concede

that the Customer Agreements (“Agreements”) between

them and Verizon Wireless have always included an

arbitration provision. Compl. 1 9. Respondents’

Agreements require the parties “TO SETTLE

DISPUTES ... ONLY BY ARBITRATION” and

provide that “THE FEDERAL ARBITRATION ACT

APPLIES TO TH[E] AGREEMENT.” Joint Appendix

on Appeal, Vol II, at A54. The arbitration provisions

further provide that “ANY CONTROVERSY OR

CLAIM ARISING OUT OF OR RELATING TO TH[E}

AGREEMENT, OR ANY PRIOR AGREEMENT FOR

WIRELESS SERVICE WITH [VERIZON

WIRELESS] OR ANY OF [ITS] AFFILIATES OR

PREDECESSORS IN INTEREST, OR ANY

PRODUCT OR SERVICE PROVIDED UNDER ORIN

CONNECTION WITH THIS AGREEMENT OR

SUCH A PRIOR AGREEMENT” will be subject to

arbitration. Jd. There is no dispute that the arbitration

clauses apply to all of the claims Respondents attempted

to bring in federal court.

The arbitration provisions preclude class

arbitration: “THIS AGREEMENT DOESN’T PERMIT

CLASS ARBITRATIONS EVEN IF TH[E]

PROCEDURES [OF THE AAA OR BBB] WOULD.” Jd.

However, “IF FOR SOME REASON THE

PROHIBITION ON CLASS ARBITRATIONS...IS

DEEMED UNENFORCEABLE, THE)® THE

AGREEMENT TO ARBITRATE WILL NOT APPLY.”

Id. at A55. Thus, arbitration must be on an individual

basis. Jd. at A54.

4. The Proceedings Below.

In October 2007, Respondents filed a putative class-

action lawsuit against Verizon Wireless in the United

States District Court for the District of New Jersey. App.

9a. Respondents alleged that Verizon Wireless unlawfully

imposed an administrative charge. App. 9a. Verizon

Wireless filed a motion to compel individual arbitration

in accordance with Respondents’ Agreements. App. 8a-

9a. Respondents opposed the motion, contending that

the arbitration agreements were unconscionable under

Muhammad. App. 11a. The parties agreed that the only

question for the district court was whether Muhammad

is preempted by the FAA. App. lla, 18a..

The district court granted Verizon Wireless’s motion

to compel. App. 28a. In doing so, it relied on the Third

Circuit’s opinion in Gay v. Creditinform, 511 F.3d 369,

394-95 (3d Cir. 2007), which held that the FAA preempted

two Pennsylvania court decisions that had held

arbitration clauses unconscionable because they

required individual arbitration of low-dollar contract

claims. See Thibodeau v. Comcast Corp., 912 A.2d 874

(Pa. Super. Ct. 2006); Lytle v. CittFinancial Servs., Inc.,

810 A.2d 648 (Pa. Super. Ct. 2002). The court in Gay

refused to apply those decisions because they found

arbitration provisions unconscionable “because [they

were] agreement(s] to arbitrate” and not, as required

by the FAA, for a reason applicable to “any contract.”

511 F.3d at 394-95. Finding Gay indistinguishable, the

district court concluded that the FAA preempted

Muhammad and ordered the parties to proceed to

arbitration. App. 3a.

The Third Circuit reversed, relying on Homa »

American Express Co., 558 F:3d 225 (3d Cir. 2009), a

decision issued after the district court’s decision in this

case. App. 7a. In Homa, the Third Circuit distinguished

Gay, holding that the FAA did not preempt Muhammad.

Homa, 558 F.3d at 230. The Homa court concluded that

Muhammad did not evince hostility toward arbitration

clauses, but instead applied generally applicable state

contract law, and thus did not conflict with the FAA. /d.

Finding Homa “directly on point and binding” on the

panel, the Third Circuit reversed and remanded. App.

7a. Shortly thereafter, this Court granted certiorari in

Concepcion. 130 S. Ct. 3322 (2010). In light of Verizon

Wireless’s argument that the question presented in

Concepcion will] directly impact this case, on July 7, 2010,

the Third Circuit entered a stay of the mandate in this

case pending the filing of a petition for a writ of certiorari.

Order, Litman v. Celleo P’ship, No. 08-4103 (July 7,

2010).

REASONS FOR GRANTING THE PETITION

I. As The Court’s Recent Grant Of Certiorari In

Concepcion Demonstrates, This Case Satisfies

The Rule 10 Standard For Granting Certiorari.

This case presents an important and recurring

question of federal law: whether the FAA preempts

States from conditioning the enforcement of an

arbitration agreement on the availability of class-wide

arbitration. The importance of this question is

indisputable—the Court examined this very issue over

25 years ago, and since then, consumer arbitration

agreements have become increasingly prevalent. The

Court recently confirmed the importance of this

question when it granted certiorari in Concepcion.

Because Concepcion is identical to this case in all

material respects, the Court’s grant of certiorari there

demonstrates that this petition meets Rule 10’s standard

for granting review. Moreover, this case warrants the

Court’s review in its own right because Verizon Wireless

advances an additional theory of preemption under the

FAA that is not the focus of Concepcion.

In both this case and Concepcion, consumer-

plaintiffs brought a putative class-action lawsuit under

state law alleging that a wireless carrier had imposed

unlawful fee increases. The wireless carrier in each case

moved to compel bilateral arbitration by enforcing class-

arbitration waivers. And, in both cases, the consumer-

plaintiffs argued that the class-arbitration waivers were

unconscionable and unenforceable pursuant to

applicable state-court decisions. Compare Litman, 2010

WL 2017665, at *2-3 (citing Muhammad, 912 A.2d 88),

with Laster v. AT&T Mobility LLC, 584 F.3d 849, 854

(9th Cir. 2009) (citing Discover Bank, 113 P3d 1100).

Moreover, the applicable state-court decisions—

Muhammad aad Discover Bank—both held that a class-

arbitration waiver in a standard-form retail contract was

an unconscionable “exculpatory clause” that violates

“publie policy” in the context of “low-value” consumer

claims. Muhammad, 912 A.2d at 99-100; Discover Bank,

113 P3d at 1108-09. Indeed, Muhammad is derivative

of Discover Bank, having relied on it in reaching the

conclusion that class-arbitration waivers are

unconscionable. See, e.g., Muhammad, 912 A.2d at 99

(citing Discover Bank, 113 P3d at 1110).

As a result, the ultimate question to be resolved

both here and in Concepcion is whether the FAA

preempts those state-court decisions. The Ninth Circuit

in Concepcion held that the FAA did not preempt

Discover Bank. See Laster, 584 F.3d at 857-58. The Third

Circuit reached the same conclusion with respect to

Muhammad. See Litman, 2010 WL 2017665, at *1-2.

Even setting aside the grant of certiorari in

Concepcion, the importance of this case is obvious. The

FAA was intended to benefit both consumers and

businesses by promoting arbitration as a streamlined,

cost-efficient alternative to litigation. Allied-Bruce, 518

U.S. at 280. Class arbitration, however, fundamentally

alters the nature and character of arbitration. See Stolt-

Nielsen S.A. v. AnimalFeeds Int'l Corp., 1308S. Ct. 1758,

1776 (2010) (highlighting “the fundamental changes

brought about by the shift from bilateral arbitration to

class-action arbitration”). In fact, class arbitration is so

cumbersome that wireless carriers often include

provisions that render the entire arbitration clause

inapplicable if class arbitration is imposed as a matter

of state law. See Amicus Brief of CTIA, supra, at 17-18.

If allowed to stand, the Third Cireuit’s decision will

deprive consumers and businesses of the many benefits

of bilateral arbitration. Together, the Third and Ninth

Circuit decisions will sharply curtail the availability of

arbitration on a nationwide basis—an outcome contrary

to the federal policy favoring arbitration. Moses H. Cone,

460 U.S. at 24. Indeed, the preemption question

presented in this case has the potential to affect literally

hundreds of millions of arbitration agreements and thus

hundreds of millions of parties thereto (both consumers

and businesses).

Finally, and perhaps most importantly, certiorari

should be granted because this case involves an

additional theory of FAA preemption that is not the

focus of Concepcion, a theory that could potentially

dispose of both cases. See infra Part ILA. The argument

provides an independent basis on which the Court may

conclude that the FAA preempts the application of state

publie policy to invalidate class-arbitration waivers.

Consideration of this alternative theory—rooted in the

text, structure, and history of the FAA—is critical to a

clear and lasting resolution of the question presented

here and in Concepcion.’

1. If the Court grants review in this case, it could consider

and decide the case together with Concepcion even though the

two cases would not be heard together. The Court resolved the

“honest services” cases in this manner last Term. See Skilling

v. United States, 180 S. Ct. 2896, 2912 n.9 (2010) (noting that

the Court “granted certiorari and heard arguments this Term

in... Black v. United States, No. 08-876 [and] Weyhrauch v.

United States, No. 08-1196... and vacate{[d] and remand|ed|

those decisions in light of |Skilling|”).

Il. Review Of This Case Is Warranted Because The

Decision Below Conflicts With The FAA And This

Court’s Precedent.

By its terms, Section 2 of the FAA displaces

otherwise applicable law, making arbitration

agreements “valid, irrevocable, and enforceable,” as a

matter of federal law, “save upon such grounds as exist

at law or in equity for the revocation of any contract.” 9

U.S.C. § 2. “In enacting § 2 of the federal Act, Congress

... withdrew the power of the states to require a judicial

forum for the resolution of claims which the contracting

parties agreed to resolve by arbitration.” Southland,

465 U.S. at 10. It is thus “well-established” that Section

2 is a preemption statute. Preston, 552 U.S. at 353.

Under Section 2, state law is preempted unless it is

a ground “for the revocation of any contract.” To avoid

the preemptive sweep of Section 2, state law must be

both a ground for revocation and applicable to any

contract. The New Jersey Supreme Court’s decision in

Muhammad runs afoul of both of these requirements.

It does not rest on a recognized ground for the

“revocation” of a contract as that term is used in Seetion

2, and it does not apply a rule of law that is applicable to

“any contract.”

A. Section 2 Preempts State Law That Does Not

Relate To “The Making Of The Agreement To

Arbitrate,” Including Substantive

Unconscionability.

As this Court has noted many times, Section 2 is

the cornerstone of the FAA. It declares, as a matter of

federal law, that agreements to arbitrate are “valid,

irrevocable, and enforeeable.” This declaration was

meant to preclude courts from refusing to enforce

otherwise valid arbitration agreements. At the same

time, Section 2 includes a “savings clause” that allows

for the operation of some, but not all, state contract law

doctrines on arbitration clauses. The savings clause

authorizes courts to refuse enforcement of arbitration

agreements upon “grounds as exist in law or equity for

the revocation of any contract.” Properly interpreted,

“grounds” for “revocation” do not include substantive

unconscionability.

Congress’s use of the single term “revocation” in

the savings clause was critical. Unlike invalidity or

unenforceability, revocation was understood to refer

exclusively to defects in the formation of the contract.

Thus, procedural defects, such as fraud or duress, were

preserved as defenses to arbitration agreements under

Section 2, but substantive attacks on arbitration clauses,

under doctrines such as unconscionability or public

policy were excluded from the savings clause. Indeed,

application of these doctrines of invalidity and

unenforceability to arbitration agreements is exactly

what the FAA was enacted to stop.

This reading of the term “revocation” in Section 2

is confirmed by looking to the judicial enforcement

provisions of the FAA, Sections 3 and 4. Sections 3 and

4 of the FAA provide the mechanism to obtain judicial

enforcement of Section 2. Section 4, in particular,

outlines a procedure for a “party aggrieved by the

alleged failure, neglect, or refusal of another to arbitrate

under a written agreement for arbitration” to petition a

federal district court to compel arbitration. 9 U.S.C. § 4.

Consistent with Section 2’s proclamation that all

arbitration agreements are “valid, irrevocable, and

enforceable” as a matter of federal law, Section 4

mandates that a court considering such a petition must

compel arbitration. /d. (“[T]he court shall make an order

directing the parties to proceed to arbitration in

accordance with the terms of the agreement.”). The only

condition on this statutory mandate is that the court

must be “satisfied that the making of the agreement for

arbitration ... is not in issue.” 7d. (emphasis added).

Thus, the language of Section 2—when read

together with Section 4—“indicates that Congress

created an exception to the general rule (that an

arbitration clause will be enforced by its terms) only

when there is a flaw in the formation of the agreement

to arbitrate.” Nat'l R.R. Passenger Corp. v. Consol. Rail

Corp., 892 F.2d 1066, 1070 (D.C. Cir. 1990); Dean Witter

Reynolds, 470 U.S. at 218 (reading together Sections

2,3, and 4 and concluding that a court “shall direct the

parties to proceed to arbitration ... absent a ground

for revocation of the contractual agreement”); see also

Supak & Sons Mfr. Co. v. Pervel Indus., 593 F.2d 135,

137 (4th Cir. 1979) (“| Although] it does not displace state

law on the general principles governing formation of the

contract itself... § 2 is preemptive of conflicting state

laws which restrict the validity or enforceability of

arbitration agreements.”).

Grounds for revoking an arbitration agreement thus

include only defects such as fraud, duress, unequal

bargaining power, and lack of capacity. See Prema Paint

Corp. v. Flood & Conklin Mfg. Co., 888 U.S. 395, 403-04

(1967) (finding that a court properly could consider a

Section 2 claim that an “arbitration clause itself”’ was

procured by a procedural defect such as fraud, since

fraud involves “an issue which goes to the ‘making’ of

the agreement| | to arbitrate”); see also rie, Bernhardt,

and Section 2 of the United States Arbitration Act: A

Farrago of Rights, Remedies, anda Right toa Remedy,

69 Yale L. J. 847, 860-61 (1960) (“[I]ssues involving the

‘making’ of the arbitration agreement, which the federal

act declares are issues for the court, ... would [include]

fraud in the inducement of the arbitration agreement,

waiver of that agreement, and... lack of legal capacity

to agree to arbitrate.” (citations omitted))

Section 2, however, does not permit inquiry into the

substantive fairness of the terms of the agreement; nor

does it allow a more expansive inquiry into whether the

procedures for arbitration further publie policy goals.

See Natl R.R. Passenger Corp., 892 F.2d at 1070 (“[A]

publie policy issue that may preclude enforcement of [an

arbitration clause] is not such a ‘ground|] as exist{s] at

law or in equity for the revocation of any contract’ within

the meaning of [Section] 2.” (quoting 9 U.S.C. § 2)). As

this Court has explained, “[a]bsent a well-founded claim

that an arbitration agreement resulted from the sort of

fraud or excessive economic power that ‘would provide

grounds for the revocation of any contract,’ the

Arbitration Act ‘provides no basis for disfavoring

agreements to arbitrate statutory claims by skewing the

otherwise hospitable inquiry into arbitrability.’”

Shearson/Am. Express Inc. v. MeMahon, 482 U.S. 220,

226 (1987) (quoting Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 627 (1985))

(emphasis added); see also Gilmer v. Interstate/Johnson

Lane Corp, 500 U.S. 20, 38 (1991); Rodriguez de Quyas v.

Shearson/Am. Express, Inc., 490 U.S. 477, 483-84 (1989).

Interpreting Section 2’s savings clause in this

manner is consistent with the common understanding

of “revocation” at the time of the FAA’s enactment. At

that time, the term “revocability” had two meanings.

In the context of arbitration agreements, “revocability”

referred to a contracting party’s ability to repudiate such

an agreement at will. Wesley A. Sturges, A Treatise on

Commercial Arbitrations and Awards § 15, at 45 (1930).

In particular, a party to an arbitration agreement was

permitted (1) to proceed with a contract action in court

despite an arbitration provision to the contrary; or,

equivalently, (2) to “terminate the powers of the other

party” under an arbitration provision. /d. Thus, an

agreement to arbitrate was “revocable” by one of the

parties at will “preeisely” because “a contract to

arbitrate [was] at issue.” Doctor's Assocs., 517 U.S. at 685.

Outside the arbitration context, “revocability”

referred to the more limited ability of a party to nullify

a contract based on formation defects. In fact, some pre-

FAA decisions criticized the special rule of “revocability”

in the arbitration context and argued that arbitration

agreements should be revocable only for the typical

reasons applicable to any contract:

An agreement [to arbitrate] induced by fraud,

or overreaching, or entered into unadvisedly

through ignorance, folly or undue pressure,

might well be... disregarded .... But when

the parties stand upon an equal footing, and

intelligently and deliberately ... provide for

an amicable adjustment of any difference that

may arise, either by arbitration, or otherwise,

it is not easy to assign at this day any good

reason why the contract should not stand ....

Sturges § 15, at 47 (quoting Del. & H. Canal Co. v. Pa.

Coal Co., 50 N.Y. 250, 258 (1872)). The New York Court

of Appeals made clear that, “[wlere the question res

nova, ...a party would not now be permitted, in the

absence of fraud or some peculiar circumstances

entitling him to relief, to repudiate his agreement to

submit to arbitration ....” Del. & H. Canal, 50 N.Y. at

258 (emphasis added); see also Henry v. Lehigh Valley

Coal Co., 64 A. 635, 636 (Pa. 1906).

In declaring arbitration agreements irrevocable but

still subjecting them to challenges based on “grounds .. .

for the revocation of any contract,” Congress thus

discarded the arbitration-specifie concept of revocability

but preserved the traditional, neutral form of

revocability. See Zimmerman v. Cohen, 236 N.Y. 15, 20

(1923) (“The word ‘irrevocable,’ ... means that the

[arbitration agreement] cannot be revoked at the will

of one party to it, but can only be set aside for facts

existing at or before the time of its making which would

move a court of law or equity to revoke any other

contract.”); Moses H. Grossman, Trade Security Under

Arbitration Laws, 35 Yale L.J. 308, 319 (1926) (same);

Julius Henry Cohen, The Law of Commercial

Arbitration and the New York Statute, 31 Yale L.J. 147,

149 (1921) (“The statute does not merely validate and

make enforceable and irrevocable agreements for

arbitration. The act recognizes that the infirmities,

common to all contracts, which furnish ground for

revocation at law or in equity, may still exist in cases of

arbitration agreements.”).° “Thus, generally speaking,

if in a[n] ... action to compel arbitration an issue of

fraud, d ress or misrepresentation is raised, the courts,

before ermining whether the parties are to proceed

to arbit:ation, must first decide that issue.” The

Arbitrable Issue: The Problem of Fraud, 28 Fordham

L. Rev. 802, 802 (1960) (citation omitted).

Just as case law and scholarship from this era

confirm that Congress rejected the arbitration-specific

form of revocability, they also confirm that the terms

“valid” and “enforceable” in Section 2 meant something

different from “irrevocable.” Under the rubric of public

poliey—most notably, publie policy against ouster of the

judicial process—pre-FAA courts often held arbitration

agreements invalid or otherwise “refused to enforce

arbitration agreements specifically.” See Arbitration of

Interstate Commercial Disputes: Joint Hearings Before

the Subeomms. on the Judiciary, 68th Cong. 38 (1924)

(“1924 Hearings”). By declaring arbitration agreements

“valid” as a matter of federal law, Congress ensured that

arbitration agreements would be formally recognized

by the courts. See id.; Erie, supra, at 854. And by

2. As this Court has acknowledged, the New York courts’

analysis of the New York Arbitration Act has special relevance

because the FAA was based upon the New York act, see Allied-

Bruce, 513 U.S. at 287 (noting that “the FAA was copied” from

the New York act), and “embodies practically all of the important

provisions of the New York prototype of modern state

arbitration statutes.” Harry Baum & Leon Pressman, The

Enforcement of Commercial Arbitration Agreements in the

Federal Courts, 8 N.Y.U.L.Q. Rev. 238, 251 (1930) (citations

omitted).

prociaiming arbitration agreements “enforceable,”

Congress ensured that arbitration agreements would

be entitled to specific performance. See 1924 Hearings,

supra, at 38; Erie, supra, at 856; The New Federal

Arbitration Law, 12 Va. L. Rev. 265, 276-78 (1926).

The distinct meanings of “revocability,” “invalidity,”

and “unenforceability” at the time Congress enacted the

FAA further support this textually-rooted reading of the

savings clause in Section 2. Congress declared

arbitration agreements “valid” and “enforceable” in

Section 2 to eliminate non-formation doctrines that

denied enforcement to arbitration clauses based on

judicial notions of fairness or state public policy.

Congress declared them “irrevocable” to eliminate the

special rules of revocation applied to arbitration

agreements. Viewed in this light, grounds for

“revocation” in Section 2’s savings clause can only refer

to traditional formation defects—for any broader

meaning would have the exception swallowing the rule.

See AT&T Co. v. Cent. Office Tel., Inc., 524 U.S. 214, 228

(1998).

Construing “revocation” to refer only to formation

defects vindicates the FAA’s “basic precept that

arbitration is a matter of consent, not coercion.” Stolt-

Nielsen, 1380S. Ct. at 1773 (internal quotation omitted).

This limitation prevents States, such as California in

Discover Bank and New Jersey in Muhammad, from

invoking state public policy or their own sense of fairness

to foree parties to arbitrate on terms or use procedures

not agreed to. See Volt Info. Scis., Inc. v. Bd. Of Trs,

489 U.S. 468, 479 (1989) (“[P]arties are generally free

to structure their arbitration agreements as they see

fit. Just as they may limit by contract the issues which

they will arbitrate, so too may they specify by contract

the rules under which that arbitration will be conducted.”

(internal citation omitted)). At the same time, the States

have the power to ensure that, as in any contract, there

has been true consent in the formation of the agreement

to arbitrate.

Under this construction of Section 2, resolution of

the question presented here and in Concepcion is

straightforward. Under Muhammad and Discover

Bank, bilateral arbitration agreements are

“unenforceable” because they are substantively

unconscionable. See Muhammad, 912 A.2d at 98-102;

Discover Bank, 113 P3d at 11038. As explained above, in

New Jersey (and California) whether a consumer

arbitration agreement is substantively unconscionable

turns on concepts of fairness and notions of public policy,

not whether there are defects in formation. See

Muhammad, 912 A.2d at 98-99, 101-02; Discover Bank,

113 P3d at 1103. Because substantive unconscionability

is not a “ground[]” for “revocation” under Section 2,

Muhammad (and likewise Discover Bank) is preempted

by Section 2.

B. Section 2 Preempts New Jersey From

Manipulating Its Unconscionability Doctrine

To Disfavor Arbitration Agreements.

1. The FAA Prevents States from Applying

Laws or Doctrines that Uniquely

Disfavor Arbitration.

Under the FAA, arbitration agreements are valid,

irrevocable, and enforceable as a matter of federal law,

“save upon such grounds as exist at law or in equity for

ine revocation of any contract.” 9 U.S.C. § 2 (emphasis

added). Section 2 thus prevents states from adopting

novel laws or rules that apply only to arbitration

agreements. “A state-law principle that takes its

meaning precisely from the fact that a contract to

arbitrate is at issue does not comport with [the text of

Section 2].” Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987); see Oblix, Inc. v. Winiecki, 374 F.3d 488, 492 (7th

Cir. 2004) (“[N]o state can apply to arbitration (when

governed by the Federal Arbitration Act) any novel

rule.”).

Nor can states mask this discrimination by

pretending to apply a generally applicable contract

defense. If the defense “singl{es] out arbitration

provisions for suspect status,” Doctor’s Assocs., 517 U.S.

at 687, it is preempted by the FAA, regardless of the

label used by the state court. “That a state decision

employs a general principle of contract law, such as

unconscionability, is not always sufficient to ensure that

the state law rule is valid under the FAA.” [beria Credit

Bureau, 379 F.3d at 167. “[S]tate courts are not

permitted to employ those general doctrines in ways that

subject arbitration clauses to special scrutiny.” Jd.

Section 2 thus embodies a “principle of rigorous

equality”—“antagonism toward arbitration...

howsoever manifested in state law, is preempted.” Secs.

Indus. Ass’n v. Connolly, 883 F.2d 1114, 1119-20 (1st

Cir. 1989).

New Jersey Courts Distort

Unconscionability Law to Disfavor

Arbitration Agreements.

There are two required elements. of

unconscionability in New Jersey: procedural

unconscionability, which examines “the formation of the

contract,” and substantive unconscionability, which looks

for “excessively disproportionate terms” or “the

exchange of obligations so one-sided as to shock the

court’s conscience.” Sitogum Holdings, 800 A.2d at 921.

Like the California courts, New Jersey courts

manipulate both of these factors to disfavor arbitration

agreements. Compare Muhammad, 912 A.2d at 96-97,

with Discover Bank, 113 P3d at 1108. Instead of

examining all the circumstances surrounding the

formation of the contract, New Jersey courts

automatically find procedural unconscionability when a

consumer arbitration agreement is contained in an

“adhesion contract.” See Muhammad, 912 A.2d at 97.

And instead of focusing on the contract terms as they

relate to the individual parties, the courts determine

substantive unconscionability by examining broad public

policy concerns. See id. at 98-99, 101-02. The FAA

preempts exactly this type of manipulation. See Doctor’s

Assocs., 517 U.S. at 687.

New Jersey courts generally determine procedural

unconscionability by focusing on formation defects,

examining “a variety of inadequacies, such as age,

literacy, lack of sophistication, hidden or unduly complex

contract terms, bargaining tactics, and the particular

setting existing during the contract formation process.”

Sitogum Holdings, 800 A.2d at 920-22. In particular,

courts €xamine whether there was an “absence of

meaningful choice” when the contract was formed. /d.

at 920 (quotation omitted). Whether a meaningful choice

exists “ean only be determined by consideration of al]

the circumstances surrounding the transaction.” Abel

Holding Co. v. Am. Dist. Tel. Co., 350 A.2d 292, 304 (N.J.

Super. Ct. 1975) (citation omitted).

Thus, in the non-arbitration context, New Jersey

courts generally decline to find procedural!

unconscionability when the party had meaningful

commercial alternatives. For example, in Stelluti, the

New Jersey Supreme Court examined whether a

standardized contract containing an exculpatory clause

releasing a fitness center from liability was

unconscionable. Although the consumer had signed a

“standard pre-printed form presented ... on a typical

‘take-it-or-leave-it basis,’” was a layperson with no

Specialized knowledge, and presumably received no

explanation on the legal effect of releasing the fitness

center from liability, the Court found no procedural

unconscionability. Stelluti, 2010 WL 3033884, at *6.

Stelluti “could have taken her business to another

fitness club, could have found another means of exercise

aside from joining a private &ym, or could have thought

about it and even sought advice before signing up and

using the facility’s equipment.” /d. Thus, “although the

terms of the agreement were presented ‘as is’ to

Stelluti,” the court found that “the agreement was not

void based on any notion of procedural]

unconscionability.” /d.

But in the arbitration context, New Jersey courts

undertake a completely different analysis. Following

California’s lead, New Jersey courts automatically find

procedural unconscionability when a consumer

arbitration agreement is in a standardized contract. See

Muhammad, 912 A.2d at 96 (“[A]dhesion agreements

necessarily involve’ indicia of procedural

unconscionability.”); Discover Bank, 113 P3d at 1108.

For example, in Estate of Ruszala v. Brookdale Living

Communities, Inc., the court examined whether

arbitration agreements with an assisted living facility

were unconscionable. 2010 WL 3118695, at *1 (N.J.

Super. Ct. App. Div. Aug. 10, 2010). The court noted “the

absence of evidence showing procedural

unconscionability,” such as how the contracts were

formed or the parties’ level of education and

sophistication in legal matters. /d. at *12. Nevertheless,

the court was “satisfied that the residency agreements

[were] contracts of adhesion” and were therefore

procedurally unconscionable. /d. at *12-13. In short, the

court applied a different, less-demanding procedural

unconscionability standard than it employs outside the

arbitration context.

New Jersey courts also distort substantive

unconscionability law to disfavor consumer arbitration

agreements. At its base, substantive unconscionability

examines only the contract terms as they relate to the

individual parties to the contract at the time of

contracting. See Howard, 574 A.2d at 999-1000

(requiring “such patent unfairness in the contract that

no reasonable person not acting under compulsion or

out of necessity would accept its terms”); see also

Reibold v. Simon Aerials, Inc., 859 F. Supp. 193, 199

(E.D. Va. 1994) (“[WJ]hether any agreement is

unconscionable or not can only be examined with

reference to the vriginal parties to the bargain.”). In

contrast, the invocation of judicial notions of public

policy as a basis for disregarding a contract term places

the focus not on the parties to the contract but on the

interests of third parties outside of the contract, e.g.,

the general population. See Vasquez v. Glassboro Serv.

Ass’n, Inc., 415 A.2d 1156, 1162-68 (N.J. 1980) (“[C Jourts

in New Jersey have refused to enforce contracts that

violate the public policy of the State. ... Contracts have

been declared invalid because they violate statutes,

promote crime, interfere with the administration of

justice, encourage divorce, violate public morality, or

restrain trade.” (citations omitted)).

Thus, public policy is not part of the substantive

uneconscionability analysis, at least outside of the

arbitration context. See, e.g., Stelluti, 2010 WL 3033884,

at *7-13 (finding no unconscionability and separately

analyzing “whether enforcement of an exculpatory

agreement would be contrary to public policy”);

Marcinczyk v. State of N.J. Police Training Comm'n,

968 A.2d 1205, 1210 (N.J. Super. Ct. App. Div.)

(examining separately whether an exculpatory

agreement is unenforceable because it “(1) negatively

impacts the public interest ... or (3) is unconscionable”),

cert. granted, 200 N.J. 370 (2009).

But in the consumer arbitration context, New Jersey

courts shoe-horn broad conceptions of public policy into

substantive unconscionability. Indeed, after Muhammad,

bilateral arbitration agreements are substantively

unconscionable because they violate a New Jersey

publie policy favoring the incidents of a judicial class

action. 912 A.2d at 99, 102 (explaining that the “most

important” factor was “the public interest] affeeted by

the contract” and that the court’s unconscionability

finding was “rooted in [a] fact-sensitive public interest

assessment”) (emphasis added); see Estate of Ruszala,

2010 WL 3118695, at *15 (expressly declining to limit

its unconscionability analysis to the rights and duties of

the parties to the arbitration agreement and instead

employing a “broader inquiry into how the identified

restrictions affect our State’s public policy of protecting

4 vulnerable and diserete class of consumers”).

In particular, the M uhammad court focused on the

allegedly exculpatory nature of the class-action waiver.

That is, Muhammad focused on the effect of the class

action waiver on third parties and general corporate

fraud enforcement as opposed to the rights and duties

of the parties to the particular contract. Muhammad,

912 A.2d at 96-97. Accordingly, substantive

unconseionability as applied in Muhammad is not a

“senerally applicable contract defense”—it is the

enforcement of a “public policy” that disfavors individual

arbitration.”

By inserting their public policy concerns directed

at bilateral arbitration into the doctrine of substantive

unconscionability, New Jersey courts attempt to mask

their anti-arbitration animus. But even a cursory

8 Moreover, the “exculpatory clause” rationale ignores

the fact that state attorneys general, see, ¢.9., N.J.S.A. 56:8-1 et

seq. (authorizing the New Jersey Attorney General to enforce

state consumer protection law), and appropriate federal

agencies have oversight over sellers of consumer products. Cf

Gilmer, 500 U.S. at 32 (“L1]t should be remembered that

arbitration agreements will not preclude the EEOC from

bringing actions seeking class-wide and equitable relicf.”).

comparison of arbitration and non-arbitration cases

reveais stark differences in analysis and result.

Compare Muhammad, 912 A.2d at 98-99 (refusing to

enforce an arbitration provision in a standardized

contract because “public policy” prohibits a class-

arbitration waiver from “effectively” functioning as an

“exculpatory clause”), with Stelutti, 2010 WL 3033884,

at *7, *10-12 (enforcing an express exculpatory clause

in a standardized contract and noting that the

“avoidance of a flood of litigation” could be an “important

public policly]” (internal quotation marks and alterations

omitted)). This “kind of value judgment is foreclosed

precisely because the FAA ordains that the state’s

appulse toward arbitration agreements must be the

same as its approach to contracts generally.” Secs.

Indus. Ass’n, 883 F.2d at 1121. What matters is not the

legal label placed on the doctrine, but the manner in

which the doctrine has been employed. Were the law

otherwise, States would be free to thwart arbitration

at will by simply invalidating any disfavored arbitration

provision as substantively unconscionable. /beria Credit

Bureau, 379 F.3d at 167 (“[S|tate courts are not

permitted to employ those general doctrines in ways that

subject arbitration clauses to special scrutiny.”).

Muhammad also violates the FAA by singling out a

particular class of contracts for which bilateral

arbitration is forbidden. By holding that a class-

arbitration waiver in any consumer contract in a case

involving a “low-value” dispute is substantively

unconscionable, see Delta Funding, 912 A.2d at 115, the

New Jersey Supreme Court has rendered an entire class

of arbitration agreements unconscionable under New

Jersey law. This is flatly forbidden under the FAA. See

Saturn Distribution Corp. v. Williams, 905 F.2d 719,

726 (4th Cir. 1990) (“The FAA does not permit a state to

single out arbitration agreements in standardized

contracts and, in effect, declare their very formation to

be uneonscionable.”). Only Congress—not the courts—

may “identify any category of claims as to which

agreements to arbitrate will be held unenforceable.”

Mitsubishi Motors, 473 U.S. at 627.

C. Muhammad Conflicts With The Policies

Underlying the FAA.

In addition to conflicting with the plain language of

Section 2, Muhammad also conflicts with the policies

embodied in the FAA. Congress enacted the FAA “to

ensure that private agreements to arbitrate are

enforced according to their terms,” Mastrobuono v.

Shearson Lehman Hutton, Inc., 514 U.S. 52, 52 (1995),

and to “revers[e] centuries of judicial hostility to

arbitration agreements,” Scherk, 417 U.S. at 510. The

Court has explained that “Section 2 is a congressional]

declaration of a liberal federal policy favoring arbitration

agreements, notwithstanding any state substantive or

procedural policies to the contrary.” Moses H. Cone, 460

U.S. at 24. Because refusal to enforee a class-arbitration

waiver conflicts with these policies, Muhammad is

preempted. See Geter v. Am. Honda Motor Co., 529 U.S.

861, 873 (2000).

“(The central or primary purpose of the FAA is to

ensure that private agreements to arbitrate are

enforced according to their terms.” Stolt-Nielsen, 130

S. Ct. at 1773 (internal quotation marks omitted). This

includes terms dictating the “procedure” for arbitration.

Hall Street Assocs., LLC v. Maiiel, Inc., 552 U.S. 576,

O86 (2008); see also 9 U.S.C. § 4 (“A party aggrieved by

the alleged failure, neglect, or refusal of another to

arbitrate under a written agreement for arbitration may

petition any United States district court ... for an order

directing that such arbitration proceed in the manner

provided for in such agreement.” (emphasis added)).

In other words, the FAA ensures that “arbitration is a

matter of consent, not coercion.” Stolt-Nielsen, 130 S.

Ct. at 1773 (internal quotation marks omitted).

The Court recently made clear that there is no policy

imperative to ignore the terms of an arbitration

agreement and insist on the availability of class

procedures. In Stolt-Nielsen, the Court held that “a

party may not be compelled under the FAA to submit to

class arbitration unless there is a contractual basis for

concluding that the party agreed to do so.” 130 S. Ct. at

1775 (emphasis in original). Both “eourts and

arbitrators,” the Court emphasized, “must not lose sight

of” their task “to give effect to the intent of the parties.”

Id. They “‘ha[ve] no general charter to administer

justice for a community which transcends the parties.”

/d. (quoting United Steelworkers of Am. v. Warrior &

Gulf Navigation Co., 363 U.S. 574, 581 (1960)).

Muhammad contravenes this principle by requiring

that, as a matter of state law, consumer arbitration

agreements must either allow collective arbitration or

face judicial nullification. 7d. (“{PJarties are ‘generally

free to structure their arbitration agreements as they

see fit’ land]... may specify with whom they choose to

arbitrate their disputes.”). Indeed, New Jersey is

replacing the agreed-upon arbitration rules with a

ae,

process that undoubtedly will be far more complex and

less expeditious than contracted for by the parties. See

Mitsubishi Motors, 473 U.S. at 628 (explaining that this

Process “trades the Procedures and Opportunity for

review of the courtroom for the simplicity, informality,

and expedition of arbitration”). In Short, Muhammad

is “fundamentally at war with the foundational FAA

principle that arbitration is 4 matter of consent.” Stolt-

Nielsen, 130 S. Ct. at 1775. Because Muhammad has

imposed New Jersey's idiosyneratie policy views on the

contracting Parties, thereby effectively rewriting

lawfully formed arbitration agreements, it directly

conflicts with the FAA and is preempted.

Muhammad's refusal to enforce a bilateral

arbitration agreement on the basis of New Jersey public

Policy in favor of class procedures is precisely the sort

of “judicial hostility to arbitration agreements” that the

FAA was enacted to reverse. Scherk, 417 U.S. at 510;

see Hall Street, 552 U.S. at 58] (“Congress enacted the

FAA to replace judicial] indisposition to arbitration.”). If

a court could simply alter the terms of an arbitration

agreement, as the Muham mad court did. nothing would

prevent it from turning an arbitration Proceeding into

the equivalent of a judicial] Proceeding complete with a

Jury and the Federal Rules of Evidence. Arbitration,

however, is meant to be different from litigation—its

primary goal is to be swifter and less expensive. See H.R.

Rep. No. 97-542, at 13 (1982); 14 Penn Plaza LLC »v.

Pyett, 129 S. Ct. 1456, 1464 (2009) (“Parties generally

favor arbitration Precisely beeause of the economies of

dispute resolution.”), The Court has recognized that the

benefits of arbitration are lost when arbitration shifts

from bilateral] to class-action arbitration. See Stolt-

Nielsen, 1380 S. Ct. at 1776. Nor could Congress have

envisioned the application of class procedures to

arbitration, as Federal Rule of Civil Procedure 23, which

controls class action litigation, was not enacted until

1937, twelve years after the FAA.

Nevertheless, Muhammad held that a clause

requiring bilateral arbitration was unenforceable solely

because it was, in the court’s view, contrary to a state

public policy that favors all the incidents of a class action

in a judicial forum. 912 A.2d at 97-98. Muhammad thus

quite clearly favors the procedures of a judicial class

action over bilateral arbitration. This is a prohibited

basis for nullifying an arbitration agreement. See 14

Penn Plaza, 129 S. Ct. at 1471 (“[T]hat arbitration

procedures are more streamlined than federal litigation

is not a basis for finding the forum somehow

inadequate.”).

Under Muhammad, a state court could invalidate

an arbitration agreement based upon its lack of any

procedure that the court finds, in its view, is essential

to advance some state public policy. If New Jersey can

elevate the class-action form above a selected form of

arbitration, Delaware might find that more formal

discovery is necessary in arbitration, or Pennsylvania

might find that a jury of six arbitrators must come to a

unanimous “verdict” in order to render arbitration fair

and consistent with state public policy. This path has no

logical terminus; the eorrect course under the FAA is

for the Court not to allow even the first step.

Finally, to allow New Jersey courts to rely on “public

policy” to rewrite or nullify arbitration agreements

would directly eontravene Congress's goal of precluding

courts from striking down arbitration agreements based

on common-law hostility toward arbitration. Congress

enacted the KAA in direct response to a state public

policy that permitted courts to ignore arbitration

agreements. See Sturges, supra, § 15, at 40. It would

be absurd to conclude that the FAA nonetheless permits

the survival of state public policy that voids some or all

of an arbitration agreement. Such an interpretation of

the FAA would gut the statute by permitting the old

judicial hostility to arbitration to reemerge under the

guise of “public policy.” This Court has not countenanced

such backsliding. Mitsubishi Motors, 473 US. at 626-

27 (“[Wle are well past the time when judicial suspicion

of the desirability of arbitration and of the eompetence

of arbitral tribunals inhibited the development of

arbitration as an alternative means of dispute

resolution.” ).

The FAA was enacted to ensure that arbitration

agreements are enforced according to their terms and

to eliminate judicial hostility toward arbitration. After

M uhammad, however, all consumer agreements that

require individual arbitration will be unenforceable in

New Jersey. Muhammad thus frustrates the purpose

of the FAA and is preempted.

CONCLUSION

For the foregoing reasons, this Court should grant

the petition for writ of certiorarl.

395

Respectfully submitted,

PHILIP R. SELLINGER ANDREW G. McBrIDE

Topp L. SCHLEIFSTEIN Counsel of Record

GREENBERG TRAURIG, LLP THomas R. McCartHy

200 Park Avenue STEPHEN J. OBERMEIER

Florham Park, NJ 07932 J. MicHAEL CONNOLLY

(973) 360-7900 WiLey Rein LLP

1776 K Street, N.W.

Washington, DC 20006

(202) 719-7000

amcbride@wileyrein.com

September 20, 2010 Attorneys for Petitioner

APPENDIX

APPENDIX A — OPINION OF THE UNITED

STATES COURT OF APPEALS FOR THE THIRD

CIRCUIT FILED MAY 21, 2010

No. 08-4103

KEITH LITMAN; ROBERT WACHTEL, Individually

and on behalf of all others similarly situated,

Appellants,

CELLCO PARTNERSHIP d/b/a Verizon Wireless

On Appeal from the United States District Court for

the District of New Jersey

(D.C. No. 07-cv-4886)

District Judge: Honorable Freda Wolfson

Before: SCIRICA, JORDAN and COWEN, Circuit Judges

OPINION OF THE COURT

JORDAN, Circuit Judge.

Appellants Keith Litman and Robert Wachtel appeal

from an order of the United States District Court for

the District of New Jersey compelling arbitration and

dismissing their case. For the following reasons, we will

vacate the District Court’s order and remand for further

proceedings consistent with this opinion.

Appendix A

I. Background

Litman and Wachtel brought this putative class

action against Celleo Partnership d/b/a Verizon Wireless

(“Verizon”) based on Verizon’s alleged unlawful

imposition of administrative charges on class members’

cell phone accounts.’ The complaint asserts breach of

contract, unjust enrichment, and violations of the New

Jersey Consumer Fraud Act, N.J. Stat. Ann. § 56:8-1, ef

seg. Verizon moved to compel arbitration pursuant to

an arbitration clause in the relevant customer

agreements, which mandates individual arbitration of

disputes. In other words, the arbitration clause prohibits

class arbitrations.’

In response to the motion, Litman and Wachtel

countered that the arbitration clause in their customer

agreements was unenforceable because, pursuant to

Muhammad v. County Bank of Rehoboth Beach,

Delaware, arbitration provisions in contracts of adhesion

that prohibit use of a class action mechanism for low-

value claims are unconscionable under New Jersey law.

189 N.J. 1, 912 A.2d 88, 100 (N.J. 2006) (“We hold...

that the presence of the class-arbitration waiver in

1. Specifically, Litman and Wachtel argue that, in

September of 2005, Verizon imposed a bogus monthly

administrative charge of forty cents on its customers and

increased that charge to seventy cents in March of 2007.

2. The arbitration clause also provides that the agreement

to arbitrate is inapplicable in the event that the class-arbitration

provision is found to be unenforceable.

Appendix A

[plaintiff’s] consumer arbitration agreement renders

that agreement unconscionable.”). Verizon agreed for

purposes of the motion that Muhammad applies to the

parties’ dispute, but argued that Muhammad is

preempted by the Federal Arbitration Act (“FAA”).

The District Court, relying on our decision in Gay

v. Creditinform, 511 F3d 369 (3d Cir. 2007), agreed with

Verizon and dismissed the case in favor of arbitration.

The Court found the instant matter to be

indistinguishable from Gay, which it understood as

concluding that the FAA preempted Pennsylvania case

law stating that class-arbitration waivers in contracts

of adhesion are unconscionable. Litman and Wachtel

timely appealed.

After the opening and answering briefs were

submitted to us, another panel of our Court issued its

decision in Homa v, American Express Co., 558 F.3d 225

= + ES

3. Amici, American Financial Services Association,

Chamber of Commerce of the United States of America, and

Consumer Bankers Association, filed a brief in support of

Verizon likewise asserting that Homa disregarded Gay and

therefore should itself be disregarded.

Appendix A

we granted Verizon’s motion to stay the appeal pending

our en banc decision in Puleo v. Chase Bank,—F38d—,

No. 08-3837, 2010 U.S. App. LEXIS 9497, 2010 WL

1838762 (3d Cir. May 10, 2010) (en banc).

Il. Discussion'

Preliminarily, we note, as we did in Homa, that Gay’s

discussion of the application of the FAA to Pennsylvania

law appears to be dicta. Homa, 558 F:3d at 229. Homa

was admittedly ambivalent in its treatment of Gay’s

discussion of Pennsylvania law, see id., 558 F.3d at 230

(“Whether dicta or not... .”), however, in our recently

filed Puleo opinion, we again referred to this aspect of

Gay as dicta, Puleo, 2010 U.S. App. LEXIS 9497, 2010

WL 1838762, at *3, n.2 (“[I]t is worth noting our

agreement that Gay’s discussion of Pennsylvania law

was indeed dicta, since our holding in Gay was that

Virginia law governed the parties’ arbitration

agreement.”), which it plainly is, because Gay held that

Virginia law, not Pennsylvania law, governed the parties’

dispute. Gay, 51) F.3d at 390-92. Thus, the discussion

of Pennsylvania case law in Gay was “not essential to

the decision” in that case, even if it might have been

4. The District Court’s jurisdiction was based on diversity

of citizenship pursuant to the Class Action Fairness Act of 2005.

See 28 U.S.C. § 1332(d). We have jurisdiction over this appeal

pursuant to 9 U.S.C. § 16(a)(3). Our review of the District Court's

decision to compel arbitration is plenary. T'rippe Mfg. Co. v. Niles

Audio Corp., 401 F.3d 529, 531 (3d Cir. 2005) (citing Bouriez v.

Carnegie Mellon Univ., 359 F.3d 292, 294 (3d Cir. 2004)).

Appendix A

“briefed, and argued by counsel, and ... passed on by

the court.” BLACK’S LAW DICTIONARY (9th ed. 2009).

As such, that portion of Gay is not binding on subsequent

panels of this Court. See Am. Civil Liberties Union of

N.J. ex rel. Lander v. Schundler, 168 F.3d 92, 98 n.6 (38d

Cir. 1999) (“| W Je have repeatedly held that dicta are not

binding.”).

Thus, the panel addressing Homa was not bound

by that portion of the Gay decision. Moreover — and

here we may wander into dicta ourselves — we cannot

conclude that Homa and Gay are irreconcilable.

According to Verizon, Gay requires preemption of

Muhammad because Muhammad is indistinguishable

from T'hibodeau v. Comcast Corp., 2006 PA Super 346,

912 A.2d 874 (Pa. Super. Ct. 2006), one of the

Pennsylvania cases Gay found to be preempted. Gay,

511 F.3d at 395 (“We, however, reject Lytle and

Thibodeau for we do not agree with them as there is no

escape from the fact that they deal with ayreements to

arbitrate, rather than with contracts in general ... .”).

As Verizon sees it, Homa’s conclusion to the contrary is

therefore in conflict with Gay. The dicta in Gay

interpreted Pennsylvania case law to “hold that an

agreement to arbitrate may be unconscionable simply

because it is an agreement to arbitrate,” and the

preemption determination that followed was based on

that construction. Gay, 511 I.3d at 395. By contrast, in

Homa, we read Muhammad to apply general principles

of contract interpretation in its invalidation of the class-

arbitration waiver. Homa, 558 F.3d at 230. Muhammad

did not say that arbitration itself is unconscionable, but

Appendix A

instead held that “|aJs a matter of generally applicable

state contract law, it was unconscionable for defendants

to deprive [plaintiff] of the mechanism of a class-wide

action, whether in arbitration or in court litigation.”

Muhammad, 912 A.2d at 100-101. Since Muhammad

did not evince hostility toward arbitration clauses, which

was the concern in Gay, it did not conflict with the FAA.

See Homa, 558 F.3d at 230; see also Puleo, 2010 U.S.

App. LEXIS 9497, 2010 WL 1838762, at *3, n.2 (“[T]he

New Jersey case law at issue in Homa did not evince

hostility toward arbitration clauses, which was the

concern about Pennsylvania law expressed in Gay. ”).

We also explained in /7oma that Gay could not be read

as a “blanket prohibition on unconscionability challenges

to class-arbitration provisions” since the FAA permits

the use of generally applicable contract defenses to

attack arbitration agreements. Homa, 558 F.3d at

230; see 9 U.S.C. § 2 (contractual arbitration provisions

“shall be valid, irrevocable, and enforceable, save upon

such grounds as exist at law or in equity for the

revocation of any contract.”). Verizon may be correct

that Muhammad bears many similarities to Thibodeau,

but any tension between the dicta in Gay and the holding

in Homa is not beyond resolution, as we have discussed.

See International Brotherhood of Electrical Workers,

Local 803 v. NLRB, 826 F.2d 1288, 1293 n.17 (3d Cir.

1987) (“[A]s a panel of this Court, it is our duty to

harmonize our decisions where it is possible to do so.

Consideration of alleged inconsistencies between

published opinions and the determination whether to

overrule an opinion of this Court is reserved for in bane

review.”),

Appendix A

More importantly, Homa is prior precedent that is

directly on point and binding on us. See Garcia v. AG of

the United States, 553 F.3d 724, 727 (3d Cir. 2009) (“We

are bound by precedential opinions of our Court unless

they have been reversed by an en bane proceeding or

have been adversely affected by an opinion of the

Supreme Court.”); see also Third Circuit Internal

Operating Procedure 9.1 (“{T]he holding of a panel in a

precedential opinion is binding on subsequent panels.”).

We are not in a position to reexamine Homa, and, since

it controls here, we will vacate the District Court’s order

compelling arbitration and remand for further

proceedings. °

III. Conclusion

Homa concluded that the FAA does not preempt

Muhammad and, therefore, Homa governs the outcome

of this case. Accordingly, the District Court’s order

compelling arbitration is vacated and the matter is

remanded for further proceedings consistent with this

opinion.

5. We note that the Supreme Court’s recent ruling in Stolt-

Nielson S.A. v. AnimalFeeds International Corp. S. Ct.—

2010 U.S. LEXIS 3672, 2010 WL 1655826 (Apr. 27, 2010), does

not alter our analysis and conclusion. The Stolt-Nielson Court

addressed the specific question of “whether imposing class

arbitration on parties whose arbitration clauses are ‘silent” on

that issue is consistent with the [FAA].” 2010 U.S. LEXIS 38672,

(WL) /d. at *4. It did not consider the distinct issues of state

law preemption and unconscionability. In fact, the en bane Court

in Puleo expressly cited Stolt-Nielson without then questioning

whether it precluded an unconscionability determination. See

Puleo, 2010 U.S. App. LEXIS 9497, 2010 WL 1838762, at *6 n.5.

APPENDIX B — OPINION OF THE

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY DATED

SEPTEMBER 29, 2008

Civil Action No.: 07-CV-4886( F LW)

LITMAN, et al.,

Plaintiffs,

CELLCO PARTNERSHIP

d/b/a VERIZON WIRELESS,

Defendant.

OPINION

WOLFSON, United States District Judge:

Plaintiffs Keith Litman and Robert Wachtel

(collectively “Plaintiffs”), Verizon customers since at

least 2004, bring this class action lawsuit against

Defendant Cellco Partnership d/b/a Verizon Wireless

(“Defendant” or “Verizon”) alleging Defendant

improperly imposed an administrative charge on their

cellular telephone accounts. In aceordance with the

Customer Agreements between the Plaintiffs and

Verizon, which included arbitration provisions,

Defendant files the current Motion to Compel

Appendix B

Arbitration in lieu of an Answer.' Plaintiffs argue that

the arbitration provisions’ preclusion of class arbitration

should be invalidated because they are unconscionable

under New Jersey law. On the other hand, Defendant

claims that the Federal Arbitration Act (“FAA”), as

interpreted by the Third Circuit, preempts New Jersey

law. For the reasons discussed below, the Court finds

that the arbitration agreement is enforceable and

Defendant’s Motion to Compel Arbitration is granted.

I. Factual Background and Procedural History

The Court will only recount facts relevant for the

purpose of this motion. On October 9, 2007, Plaintiffs

filed this suit against Verizon on behalf of other similarly

situated Verizon customers claiming that they were

unlawfully charged an “administrative charge” of $ 0.40

and/ or $ 0.70, as part of the monthly charges for each

of their Verizon phone lines. Complaint (“Compl.”) 9 1.

Verizon provides wireless communication services to

over 60 million customers and telephone lines nationally.

Td. § 8(b). Plaintiffs allege that at the time they became

Verizon customers and entered into their fixed price

contracts with Verizon, Verizon did not charge an

administrative charge and nothing in the service

agreements specifically authorized Verizon to add such

a charge. /d. 1 21(a). Plaintiffs, however, allege that in

1. Defendant simultaneously files a Motion to Dismiss

Plaintiffs’ claims. Having determined that the parties must

arbitrate their claims, this case is dismissed, and the separate

Motion to Dismiss is moot.

10a

Appendix B

October 2005, Defendant unilaterally decided to assess

an administrative charge to all customers and informed

all customers of this change with a standard notice form.

Id. P 21(b).

Plaintiffs have been Verizon customers since at least

2004 and concede that, prior to January 2005, Verizon

used a standard customer agreement (“Agreement”)

with an arbitration provision. Jd. 1 9.° The Agreement

required Plaintiffs and Verizon “TO SETTLE

DISPUTES (EXCEPT CERTAIN SMALL CLAIMS)

ONLY BY ARBITRATION.” Defendant's Motion to

Compel Arbitration (“Def. Mot.”) Ex. A, CA-7; D, 12

(emphasis in original). Plaintiffs allege that, in January

2005, Verizon “adhesively” modified the Agreement’s

arbitration provision. /d. 1% 9, 10. The modification

stated that the “THE FEDERAL ARBITRATION ACT

APPLIES TO TH[E] AGREEMENT” and that the

Agreement “DOESN’T PERMIT CLASS

2. Defendant claims that the November 2006 Agreement

governs Litman’s Verizon account and the September 2007

Agreement governs Wachtel’s Verizon account. Defendant’s

Motion to Compel Arbitration (“Def. Mot.”) Ex. A, D. While

Plaintiffs state that’Defendant needlessly confuses the

question of what version of Verizon’s Agreements control each

Plaintiff’s account and when,” Plaintiffs agree that their

continued use of Verizon's services made the revised

Agreements effective. Plaintiffs’ Brief in Opposition to

Defendant's Petition to Compel Arbitration (“Pl. Opp.”) at 2 n.

2. Beeause Verizon's customer service agreements have the same

language regarding arbitration, FAA applicability, and the class

arbitration waiver, they are addressed as one, “the Agreement,”

in this Opinion.

lla

Appendix B

ARBITRATION.” Def. Mot. at Ex. A, CA-8; D, 12

(emphasis in original). This revised Agreement also

states that “IF FOR SOME REASON THE

PROHIBITION ON CLASS ARBITRATIONS ... IS

DEEMED UNENFORCEABLE, THEN THE

AGREEMENT TO ARBITRATE WILL NOT APPLY.”

Td. at Ex. A, CA-9 (emphasis in original).

In accordance with the Agreement’s arbitration

provision, Verizon has moved to compel Plaintiffs to

individually arbitrate their claims, consistent with the

requirements of the Federal Arbitration Act (“FAA”).

In response, Plaintiffs argue that because the New

Jersey Supreme Court, in Muhammad v. County Bank

of Rehoboth Beach, Del., 189 N.J. 1, 912 A.2d 88 (2006),

has held that an arbitration provision in a consumer

contract of adhesion that precludes class arbitration of

low-value claims is unconscionable under New Jersey

‘aw, similarly, the arbitration provision in their

Agreement is unenforceable. On the other hand, while

the parties agree that Plaintiffs may proceed with this

lawsuit if Muhammad controls, Defendant contends

that, fora number of reasons, Mukammad is preempted

by the FAA, the class arbitration waiver is valid, and

Plaintiffs must arbitrate their claims individually. This

Court agrees.

l2a

Appendix B

II. Discussion

A. The Federal Arbitration Act (“FAA”)

“([AJjrbitration is a matter of contract and a party

cannot be required to submit to arbitration any dispute

which he has not agreed so to submit.” AT&T Tech., Inc.

v. Communications Workers of Am., 475 U.S. 643, 648,

106 S. Ct. 1415, 89 L. Ed. 2d 648 (1986) (citations

omitted); see also Laborers’ Int'l Union of N. Am. v.

Foster Wheeler Corp., 868 F.2d 573, 576 (3d Cir. 1989)

(per curiam). “The question whether the parties have

submitted a particular dispute to arbitration ... is an

issue for judicial determination unless the parties clearly

and unmistakably provide otherwise.” Howsam v. Dean

Witter Reynolds, Inc., 5387 U.S. 79, 83, 123 S. Ct. 588,

154 L. Ed. 2d 491 (2002) (internal quotations and

citations omitted); see also Laborers’ Int'l Union of N.

Am., 868 F.2d at 576. The court does not consider the

merits of the claim, but “decides only whether there was

an agreement to arbitrate, and if so, whether the

agreement is valid.” Great W. Mortgage Corp. v. Peacock,

110 F.3d 222, 228 (3d Cir. 1996) (citing 9 U.S.C. § 2). If

the court finds there is an agreement to arbitrate, the

disposition of the merits is left to the arbitrator. /d. The

Third Cireuit has set forth a two-prong inquiry for

courts to use when determining whether to compel

arbitration. Under this two-prong test, the questions

posed are: “(1) Did the parties seeking or resisting

arbitration enter into a valid arbitration agreement? (2)

Does the dispute between those parties fall within the

language of the arbitration agreement?” John Hancock

l3a

Appendix B

Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 187 (3d Cir.

1998) (citations omitted).

With respect to the first prong, “[f]ederal law

determines whether an issue governed by the FAA is

referable to arbitration.” Harris v. Green Tree Fin.

Corp., 183 F.8d 173, 178 (3d Cir. 1999). Similarly, the

interpretation and construction of arbitration

agreements is determined by reference to federal

substantive law. See Jd. at 179; see also Moses H. Cone

Mem 'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25 n.

32, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983). While federal

law is used to interpret such agreements, state law may

be applied, pursuant to § 2 of the FAA. Harris, 183 F.3d

at 179. Section 2 of the FAA provides that arbitration

agreements are “valid, irrevocable, and enforceable

Save upon such grounds as exist at law or in equity for

the revocation of any contract.” 9 U.S.C. § 2. The FAA

was implemented “to reverse the longstanding judicial

hostility to arbitration agreements that had existed at

English common law and had been adopted by American

courts, and to place arbitration agreements upon the

same footing as other contracts.” Gay v. CreditInform,

511 F.3d 369, 378 (3d Cir. 2007) (quoting Gilmer v.

Interstate/Johnson Lane Corp., 500 L.S. 20, 24,1118.

Ct. 1647, 114 L. Ed. 2d 26 (1991)). As such, the FAA

creates a “strong presumption in favor of arbitration,

and doubts ‘concerning the scope of arbitrable issues

should be resolved in favor of arbitration.” Great W.

Mortg. Corp. v. Peacock, 110 F.3d 222, 228 (3d Cir. 1997)

(quoting Moses H. Cone Mem'l Hosp., 460 U.S. at 24-

25). Nonetheless, “generally applicable contract

l4da

Appendix B

defenses, such as fraud, duress, or unconscionability,

may be applied to invalidate arbitration agreements

without contravening § 2.” Doctor’s Assoc., Inc. v.

Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 134 L. Ed.

2d 902 (1996). “The party challenging a contract

provision as unconscionable generally bears the burden

of proving unconscionability.” Harris, 183 F.3d at 181.

The Third Circuit has recently reaffirmed that “[t]he

text of § 2 provides the touchstone for choosing between

state-law principles and the principles of federal common

law envisioned by the passage of the FAA: An agreement

to arbitrate is valid, irrevocable, and enforceable, as a

matter of federal law, ‘save upon such grounds as exist

at law or in equity for the revocation of any contract.”

Gay, 511 F.3d 369 at 394 (quoting Perry v. Thomas, 482

U.S. 483, 492 n. 9, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987))

(emphasis in original). “[S]tate law, whether of legislative

or judicial origin, is applicable if that law arose to govern

issues concerning the validity, revocability, and

enforceability of contracts generally.” Jd. In Perry, the

Supreme Court found:

A state-law principle that takes its meaning

precisely from the fact that a contract to

arbitrate is at issue does not comport with this

requirement of § 2. A court may not, then, in

assessing the rights of litigants to enforce an

arbitration agreement, construe that

agreement in a manner different from that in

which it otherwise construes nonarbitration

agreements under state law. Nor may a court

15a

Appendix B

rely on the uniqueness of an agreement to

arbitrate as a basis for a state-law holding that

enforcement would be unconscionable, for this

would enable the court to effect what we hold

today the state legislature cannot.

483 U.S. at 492 n. 9 (internal citations omitted).

Confirming that the “FAA reflects a liberal federal policy

favoring arbitration agreements,” the Third Circuit, in

addressing class action waivers in arbitration

agreements, held that “whatever the benefits of class

actions, the FAA requires piecemeal resolution when

necessary to give effect to an arbitration agreement.”

Gay, 511 F.3d at 394 (internal citations and quotations

omitted) (emphasis in original). Therefore, the Third

Circuit has found that class action waivers in arbitration

agreements are not per se unconscionable, but rather

are valid, irrevocable, and enforceable under 9 U.S.C.

§ 2. Id.

The second part of the two-prong test requires the

Court to determine if the dispute between the parties

falls within the language of the arbitration agreement.

See John Hancock Mut. Life Ins. Co., 151 F.3d at 137.

Because Plaintiffs do not dispute that the Agreement’s

arbitration provision, if valid, applies to them, the Court

need not conduct an in-depth analysis of this second

question.

l6a

Appendix B

B. The FAA Requires Enforcement of the

Arbitration Agreement

Although the FAA requires enforcement of valid

arbitration agreements that include class action waivers,

nonetheless Plaintiffs argue that the Agreement’s

arbitration clause is unenforceable because its class

arbitration waiver renders it unconscionable pursuant

to Muhammad. In Muhammad, the New Jersey

Supreme Court held that, under state law, class

arbitration waivers may be unconscionable and

unenforceable when they are in an arbitration agreement

that is part of a consumer contract of adhesion. 189 N.J.

at 6-7. Muhammad was a customer of a payday loan

company who received a short-term unsecured loan. /d.

at 7. She brought suit on behalf of herself and other

consumers similarly situated claiming that the terms of

the loan violated the New Jersey Consumer Fraud Act

(“CFA”). Jd. at 6. The parties’ agreement included an

arbitration provision requiring all disputes to be

“resolved by binding individual (and not class)

arbitration,” and that the plaintiff ot bring, join or

participate in any class action as to any claim, dispute

or controversy [the plaintiff] may have.” /d. at 8. First,

the Court separated these two clauses and only

examined the class arbitration clause, leaving the validity

of the rest of the agreement to be determined by the

arbitrator. Jd. at 9-10. Next, the Court determined that

the arbitration agreement was part of a contract of

adhesion and therefore had some element of procedural

unconscionability. /d. at 15. Finally, the Court found that

17a

Appendix B

the arbitration clause acted as an exculpatory clause in

cases where claims were likely to be of low-value. /d. at 20.

In Muhammad, the Court distinguished its case

from Gras v. Associates First Capital Co., 346

N.J.Super. 42, 786 A.2d 886 (2001), cert. denied, 171 N.J.

445, 794 A.2d 184 (2002), which held that class action

waivers in arbitration agreements are not per se

unconscionable. Instead, the Court observed what it

declared to be a crucial factual distinction, which merited

a different result: “Gras, however, did not present the

precise issue before the Court in this matter: whether

the small amount of damages being pursued is this action

involving complicated financial arrangements and

multiple out-of-state entities effectively prevents

plaintiffs from being able to vindicate the public interests

protected by the CFA.” /d. at 22.* Thus, the Court held

that the class arbitration waiver at issue, which barred

class arbitration in obviously low-value claims, acted as

an exculpatory clause and, hence, was unconscionable

and unenforceable under state law despite New Jersey’s

public policy favoring arbitration. See /d. at 20-23. As a

result, here, where the Plaintiffs’ claims involve low-

dollar value consumer claims, both parties agree that

the Agreement’s class arbitration waiver clause is

unconscionable under New Jersey law. However,

Defendant argues that Muhammad’s holding is

3. The New Jersey Supreme Court’s ruling arguably makes

all class arbitration waivers in consumer contracts involving

low-value claims per se unconscionable and unenforceable.

18a

Appendix B

inconsistent with, and therefore preempted by, the AA.

Moreover, Verizon cites the Third Circuit’s recent

decision in Gay v. CreditInform, 511 F.3d 369, 378 (3d

Cir. 2007), as further and definitive support for that

proposition. On the other hand, if Muhammad controls,

the parties agree that Plaintiffs may proceed with this

lawsuit, as opposed to pursing its class action in

arbitration. See Pl. Opp. at 3; Df. Mot. at 9. Therefore,

the issue before this Court is whether the FAA preempts

the holding of Muhammad here.

The Third Circuit addressed this precise issue in

Gay, where the court held that a state law determination

that precludes, on unconscionability grounds,

enforcement of an agreement to arbitrate low-value

consumer claims on an individual basis is preempted by

the FAA. 511 F.3d 369. In Gay, even though two

Pennsylvania lower state court cases, Lytle v.

Citifinancial Services, Inc., 2002 PA Super 327, 810

A.2d 643 (Pa. 2002) and Thibodeau v. Comcast Corp.,

2006 PA Super 346, 912 A.2d 874 (Pa. 2006), supported

the plaintiff’s argument that the class arbitration waiver

was unenforceable, the Third Circuit noted it was

neither bound by these lower state court decisions, nor

would it be bound even if they were Pennsylvania

Supreme Court cases, because the Circuit was bound

by “federal law that Congress set forth in the FAA” and

state law “must conform with it.” Jd. at 393-94 n. 18. In

that connection, the Circuit held that class waivers in

arbitration agreements are “valid, irrevocable, and

enforceable” under the FAA notwithstanding state law

to the contrary. /d. at 394. Specifically, the court in Gay

19a

Appendix B

held “[tlo the extent, then, that Lytle and Thibodeau

hold that the inclusion of a waiver of the right to bring

judicial class actions in an arbitration agreement

constitutes an unconscionable contract, they are not

based ‘upon such grounds as exist at law or in equity

for the revocation of any contract’ pursuant to § 2 of

the FAA, and therefore cannot prevent the enforcement

of the arbitration provision in this case.” /d. (citing 9

U.S.C. § 2). The Third Circuit applied the language of §

2 to class arbitration waivers and rejected the claim that

such waivers are unconscionable. See Id. at 395.

Instead, the Third Circuit held that the Commerce and

Supremacy Clauses of the United States Constitution

require the application of the FAA and the FAA strongly

favors upholding arbitration agreements. /d. (citing U.S.

Const., Art I, § 8 el. 3; IV, cl. 2). Thus, the Circuit left

very little room for this Court to invalidate an arbitration

clause on the basis of a class waiver provision, even if it

is unconscionable under state law.

That would seem to end the analysis here, but

Plaintiffs argue that Gay does not require this Court to

find that the FAA preempts Muhammad. Plaintiffs

contend that the cases discussed in Gay, namely Lytle

and Thibodeau, are distinguishable from Muhammad

because Muhammad is “entirely neutral with respect

to arbitration agreements,” as the Court rejected class-

litigation waivers generally, not just class-arbitration

waivers; that the New Jersey Supreme Court decided

Muhammad on general contract principles and did not

demonstrate hostility to the arbitral forum, whereas the

two Pennsylvania state cases found that an agreement

20a

Appendix B

to arbitrate may be per se unconscionable. See Gay, 511

F3d at 395; Muhammad, 189 N.J. at 22. That distinction

does not hold water. “A court may not... in assessing

the rights of litigants to enforce an arbitration

agreement, construe that agreement in a manner

different from that in which it otherwise construes

nonarbitration agreements under state law.” Perry, 482

U.S. at 492. However, in Muhammad, the New Jersey

Supreme Court only looked at a class arbitration waiver

and did not look at broad class action waivers; the Court

said:

In this matter... there are two types of

elass-action waivers in the contracts

Muhammad signed: the class-arbitration

waivers and the broad class-action waivers.

The broad class-action waivers could be

eonsidered distinct from the arbitration

agreement in the contracts, and thus could

be considered part of the ‘contract as a whole.’

_.. That situation is not before us, however,

because there are distinct elass-arbitration

waivers, .. . [which] based on their location

and subject matter[] are part of the

arbitration agreements, and not part of the

eontracts as a whole.

Td. at 14. Further, although the Court, in Muhammad,

stated that “[a]s a matter of generally applicable state

contract law, it was unconscionable for defendants to

deprive Muhammad of the mechanism of a class-wide

action, whether in arbitration or in court litigation,” /d.

dla

Appendix B

at 22, nonetheless, the Court was not considering the

validity of the broad class action waiver and considered

the arbitration agreement separate from the contract.

Thus, the Court’s mention of “class-wide ... in court

litigation” is dicta. /d. Nevertheless, even if the

Muhammad Court intended to rule that all class-action

waivers of this nature were unconscionable, our

conclusion would be the same because, in Thibodeaux,

the Pennsylvania court similarly held that “[t]he

preclusion of class wide litigation or class wide

arbitration of consumer claims, imposed in a contract of

adhesion, [wa]s unconscionable anc unenforceable.” See

Thibodeau, 912 A.2d at 886. The Third Circuit found

that the FAA preempted this state law interpretation,

despite the fact that the state court purported to reject

the waiver of class treatment in general] and not just in

the context of arbitration clauses.

In Gay, the Third Circuit specifically addressed the

issue of a seemingly neutral holding involving an

arbitration agreement “written ostensibly to apply

general principles of contract law” and ruled that “[a]

finding that the arbitration provisions in [the

Pennsylvania state] cases are unconscionable can be

reached only by parsing the provisions themselves to

determine what they provide.” 511 F.3d at 395. The same

can be said of the finding in Muhammad, as the New

Jersey Supreme Court had to “pars[e] the provisions

themselves to determine what they provide.” Jd. Under

Gay, this appears to be enough to indicate that the New

Jersey Supreme Court treats arbitration agreements

differently from other contract provisions. Just as the

on on Fe

ane

Appendix B

Circuit noted in Gay, the Plaintiffs here rely on the effect

of the arbitration provisions to frame their

unconscionability arguments: they “contend that the

provision is unconscionable because of what it provides,

i.e., arbitration of disputes on an individual basis in place

of litigation possibly brought on a class action basis.”

Id. Thus, this Court is not persuaded by Plaintiffs’

arguments that Muhammad is distinguishable from

Lytle and Thibodeau such that this case is not subject

to the holding in Gay that the federal law Congress set

forth in the FAA “is controlling and the |state] law must

conform with it.” /d. at 393. Rather, | find that the facts

of Gay itself belie the distinction Plaintiffs attempt to

draw.

Plaintiffs also contend that the Pennsylvania state

decisions did not set “definitive [state] precedent”

binding the Third Circuit because Lytle, a Pennsylvania

Superior Court case, was remanded for reasons related

to class certification instead of the arbitration issue. The

Third Circuit acknowledged that “Lytle and Thibodeau

[we]re Superior Court cases and thus even if [the Third

Circuit] were concerned with pure state law they would

not bind [the Third Circuit],” but it further stated “that

even if they were Pennsylvania Supreme Court cases

[the] result would [have been] the same.” Id. at 394 n.

18 (citation omitted) (emphasis added). Similarly,

Muhammad does not bind this Court, since the issue

here is the FAA, a federal law, and “[New Jersey] law

must conform with it.” Gay, 511 F.3d at 393.

23a

Appendix B

It is also of no consequence that Muhammad was

decided under New Jersey law whereas Lytle and

Thibodeau were interpretations of Pennsylvania law. In

Thibodeau, a customer brought a class action lawsuit

against a cable company claiming damages, also of such

a minimal value that individual claims were unlikely to

be brought, caused by subscribers being charged for

equipment that they did not need. See 912 A.2d at S76.

The customer agreement had an arbitration clause

requiring individual arbitration and the court held that

an arbitration agreement containing a class waiver,

which Plaintiffs challenged, was uneonscionable under

Pennsylvania law. Jd. at 878. Mukammad is similar to

Thibodeau in its holding and its reasoning. The New

Jersey Supreme Court, like the Pennsylvania courts,

found that the clause acted as an exculpatory clause

protecting the stronger party. See Mukammad, 189 N..J.

at 6. Similarly, in the instant ease, Defendant's

arbitration clause acts to preclude class action in any

forum and the claims in this case are also of low-value.

While the holding in Muhammad, if controlling, would

render Defendant’s class arbitration waiver

unconscionable under New Jersey law, the Third Cireuit

has already held that such an arbitration provision is

enforceable under § 2 of the FAA. See Gay, 511 F.3d at

376. Indeed, the Circuit specifically analyzed the

holdings in Lytle and Thibodeau to demonstrate why

the FAA preempts state law; the Cireuit concludes its

discussion of the Pennsylvania cases by noting its

obligation to “honor the intent of Congress” and “[ilf

the reach of the FAA is to be confined then Congress

and not the courts should be the bedy to do so.” /d. at

24a

Appendix B

395.‘ Applying Gay's holding, at least two courts in this

circuit, in aceordanee with §$ 2 of the FAA, have

compelled arbitration in cases where the facts

surrounding the Agreement, arbitration clause, and

class arbitration waiver are substantially similar to this

ease. See Weinstein v. ATT Mobility Corp., No. 07-

2880, 2008 U.S. Dist. LEXIS 35666, 2008 WL 1914754

(k.D.Pa. April 30, 2008); Halprin v. Verizon Wireless

Services, LLC, No. 07-4015, 2008 U.S. Dist. LEXIS

28840, 2008 WL 961239 (D.N.J. April 8, 2008).°

Therefore, this Court too holds that, insofar as the FAA

4. Plaintiffs also argue that Gay does not preempt

Muhammad based on Shroyer v. New Cingular Wireless

Services, Jne., 498 F.3d 976 (9th Cir. 2007), a class action involving

a wireless company. See Pl. Opp. at 18. The Ninth Circuit held

that “(t]he Federal Arbitration Act does not bar federal or state

courts from applying generally applicable state contract law

principles and refusing to enforce an unconscionable class action

waiver in an arbitration clause.” Skroyer, 498 F.3d at 987. While

the Ninth Circuit has held that the FAA does not preempt state

eontract law principles invalidating class action waivers in

arbitration clauses in these cases, this Court is subject to the

binding precedent of the Third Circuit. See also Stiener v. Apple

Computer Inc., No. 07-4486, 2008 U.S. Dist. LEXIS 90335, 2008

WL 1925197, at *3 (N.D.Cal. Apr. 29, 2008). In Gay, the Third

Circuit held that the presence of a class arbitration waiver, even

where it is unconscionable under state law, is not grounds for

rendering an arbitration clause unenforceable. 511 F.3d at 394.

db. In Wernstein, the court denied the plaintiff's arguments

regarding procedural and substantive uneconscionability and

granted the defendant's motion to compel arbitration; the court

held that, pursuant to the Third Circuit's ruling in Gay, the

(Cont'd)

Appendix B

(Cont'd)

FAA preempted the state court application of state law that

held class waiver provisions in arbitration agreements

unconscionable. See 2008 U.S. Dist. LEXIS 35666, 2008 WL

1914754 at *5.

In Halprin, dealing with a challenge to the class arbitration

waiver in a Verizon customer service agreement, the court

compelled arbitration in accordance with Gay's holding and

application of the FAA. The Ha/prin Court found that it “must

determine that the ‘contract in general’ is unenforceable, not

just the individual ‘agreement to aroitrate’” to invalidate a

contract under state law pursuant to the language of the FAA.

2008 U.S. Dist. LEXIS 28840, 2008 WL 961239 at *6 (quoting

Gay, 511 F.3d at 395). While the court applied Virginia state law

when it declined to find the agreement unconscionable, it stated

that it was “dubious that Plaintiff would prevail even under

New Jersey's unconscionability rubie.” Jd.

Plaintiffs argue that the FAA does not preclude a state’s

use of substantive unconscionability to invalidate a class waiver

in an arbitration agreement. As stated in Muhammad, under

New Jersey law, the Court must consider both the procedural

and the substantive unconscionability of an agreement. See 189

N.J. at 15. When considering this standard, the Halprin court

stated: “{i]Jf an agreement is one of adhesion, where an

agreement is ‘presented on a take-it-or-leave-it basis,’ then it

indicates procedural unconscionability. In addition to

considering the adhesive nature of a contract, the Court must

also consider the subject matter of the contract. the parties’

relative bargaining position, the degree of economic

compulsion motivating the ‘adhering’ party, and the public

interests affected by the contract.” 2008 U.S. Dist. LEXIS 28840,

2008 WL 961239 at *7 (internal citations omitted). Given the

facts presented here and the Third Circuit’s decision in Gay,

(Cont'd)

26a

Appendix B

and Muhammad are inconsistent, federal law preempts

the holding in Muhammad. See U.S. Const., Art IV, el. 2.

Moreover, the Third Circuit has recently reinforced

that the FAA establishes a strong federal policy in

favor of resolution of disputes through arbitration and,

absent fraud or misrepresentation, requires

enforcement of arbitration clauses within agreements

for which parties freely contract. Morales v. Sun

Constructors, 541 F.3d 218, 2008 WL 3974059, at *2-3

(3d Cir. 2008). In Morales, the Third Cireuit held that

an employee, who was illiterate, was nevertheless bound

by an arbitration clause in an employment agreement

that he signed; “the fact that an offeree cannot read,

write, speak, or understand the English language is

immaterial to whether an English-language agreement

the offeree executes is enforceable.” 541 F.3d 218, 7d. at

*3. Rather, the court held that it was the plaintiff’s

obligation to ensure he understood the agreement before

he signed it, even where he is ignorant of the language

in which the agreement was written. See 541 F.3d 218,

(Cont'd)

like in Haplrin, while the Agreement between Plaintiffs and

Defendant bears the qualities of an adhesion agreement, the

other factors do not indicate that the entire Agreement is

substantatively unconscionable under the FAA; while Verizon

clearly has more bargaining power as between the two parties,

Plaintiffs were free to do business with any number of cell phone

companies, choose not to obtain a cell phone, or discontinue

their Verizon phone service. See /d. 2008 U.S. Dist. LEXIS 28840,

at *6-7. Therefore, when looking at prior case law applying the

FAA, this Court too finds it necessary to compel arbitration.

27a

Appendix B

Id. at *4. Morales amply demonstrates the force of the

presumption in favor of arbitration.

In this case, Plaintiffs are customers who chose

Verizon as their wireless provider at least four years

ago and continue to use Verizon today. They signed the

customer Agreement with the arbitration clause and

agreed to subsequent terms of service as added by

Verizon. Plaintiffs do not allege that they did not

understand the Agreement that they voluntarily

entered into nor do they allege fraud or

misrepresentation. The parties agreed “to settle [their]

disputes ... only by arbitration,” Def.’s Mot. at Ex. A,

CA-7, and the “agreement doesn’t permit class

arbitration.” Def.’s Mot. at Ex. A, CA-8. Therefore, the

FAA requires this Court to uphold the arbitration

plaintiffs, such as in this case, based upon this ruling. First, it

creates the opportunity for a different result depending on

whether the case is brought in federal or state court. Second, it

is also clear that compelling individual arbitration in this case

will be tantamount to ending the Plaintiffs’ pursuit of their

claims, as there is very little possibility that these Plaintiffs or

any other plaintiff will pursue individual arbitration for claims

that amount only to several dollars in damages. While this

outcome is harsh, this Court is bound by Third Circuit precedent.

As the Gay court noted, any other ruling “could result in a

significant narrowing of the application of the FAA. We express

no view on whether that might be a desirable result as it is not

our function to do so. Rather, our obligation is to honor the intent

of Congress and that is what we are doing. If the reach of the

FAA is to be confined then Congress and not the courts should

be the body to do so.” 511 F.3d at 395.

28a

Appendix B

the arbitration clause and class arbitration waiver are

valid, Plaintiffs must bring their claims against

Defendant through individual arbitration.

IV. Conclusion

For the foregoing reasons, Defendant’s Motion to

Compel Individual Arbitration is granted and the case

is dismissed.

Dated September 29, 2008

/s/ Freda L. Wolfson __

Honorable Freda L. Wolfson

United States District Judge

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